The tax bomb!

Federal Finance Minister Dr Hafeez Sheikh flanked by the Minister for Information Kaira as well as the Minister for Interior Rehman Malik announced the Cabinet decision to table the reformed general sales tax (RGST) in the parliament, increase income tax levy by 10 percent on the tax payable by all those whose income is greater than 300,000 rupees per annum, increase special excise duty from 1 to 2 percent, impose 10 percent surcharge on tax payable on every imported consignment, 10 percent surcharge on withholding tax on commercial electricity consumers as well as 10 percent surcharge on all withholding tax transactions.
Opposition by the PML (N), the PML (Q), MQM and JUI (F) has already been announced. It is highly unlikely therefore that the national parliament will pass any bill envisaging an increase in taxes; and its fate is unlikely to be any different in at least two of the provincial assemblies. The RGST is for all times to come while the increase in other taxes including income tax as well as excise duty is to be valid for six months, the Finance Minister revealed. There is a fear that once accepted by the parliament and the general public the government may well renege on this promise as well.
Much is understandably being made of the fact that those who approved the levy of a one-time rise in income tax rate are exempt from the payment of income tax. Agricultural landlords with an income comparable to that earned by the country's big industrialists as well as commercial houses, a category in which the majority of PPP cabinet members including the Prime Minister and his Minister of State for Economic Affairs belong, would remain tax-exempt. Dr Hafeez Sheikh like the Minister of Interior would also remain tax-exempt as income earned abroad including interest earned on savings banked abroad by Pakistani nationals would continue to be exempted from income tax. The President of Pakistan in whose name taxes are collected is also exempted from the payment of income tax.
In other words, only those who are paying income tax at present - the industrialists/traders/salaried class, would bear the cost of the one-time increase in income tax; or the cost of rehabilitation and reconstruction of the flood-affected persons.
Needless to add, it is these very people who were in the forefront of providing assistance to private charities, local and foreign, rather than supporting state efforts due to lack of transparency and accountability in the way the government operates. Lack of confidence in the government has no doubt been exacerbated by a decline in rating of the Corruption Perception Index for Pakistan, the multi-billion rupee scams in the state-owned entities that are continuing and recent media reports of multi-million rupee rehabilitation and reconstruction contracts being awarded to 'favourites'.
The doubling of excise duty compels us to challenge the government's assertion that the RGST to be levied at the rate of 15 percent, unlike the existing GST of 17 percent, would imply a reduction of 2 percent in tax which would be passed on to the consumers in terms of lower prices. All the taxes imposed for a limited period of time would be particularly burdensome for the middle income earners and might well push many below that level.
Be that as it may the RGST, the renamed value-added tax that had generated much controversy, is a tax that is in force in several countries. RGST is a tax on consumption. Even in the West, where incomes are high relative to Pakistan, and the unemployed eligible for social security payments, reflecting some purchasing power of even the poor, the acceptability of this tax took 3 to 4 years of sustained government efforts to educate the people that it was a good tax; and in the initial stages of its levy it was no more than 2 to 3 percent. In marked contrast our government has not made any sustained effort to inform the public of the merits and demerits of the tax and instead has focused on two factors to justify its levy.
First and foremost that it is an International Monetary Fund condition. This holds no water for the simple reason that the IMF is focused on macroeconomic issues like the budget deficit. To make the deficit sustainable requires raising taxes or reducing expenditure. The government's refusal to tax the income of the rich landlords and other high income groups are without doubt vital factors that led to the Fund's continued insistence that the VAT be levied before the next tranche is released.
And second the government has still to implement the austerity measures proposed by former Finance Minister Shaukat Tarin. Thus state-owned entities headed by, at best, unqualified and incompetent people and, at worst, corrupt officials continue to account for 300 billion rupees of budgetary support this year (3.4 billion dollars - or more than the last IMF tranche due). The Ministry of Finance is considering reducing the federal development budget by 50 percent, there is no mention of a cut in non-development expenditure, and here too unfortunately politics is playing a major role as the special packages announced by senior members of the executive would receive funds as planned notable amongst which are the Multan and Larkana packages.
The tax bomb is ready and has been launched. It remains to be seen if it will be disarmed by our parliamentarians or would the general public feel compelled to take matters in its own hands.