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We daily hear and read talks and analyses about the government's plan to levy RGST. Some argue that the tax proposals are not feasible at this stage, and some propose that the government should introduce these measures through administrative measures. The question arises: Who is right and who is wrong?
We find a golden principle regarding taxation in the dictionary of politics, ie, no taxation without representation. In other words, whether the changes are minor or major, approval from the people's representatives is a must. And there is a wisdom behind this rule, that is, that how much the people can contribute to the tax kitty must be decided by them, and in case we do not do that, implementation will not only be difficult but also impossible as the state loses its legitimacy of governance.
Even for the sake of argument, if we suppose, that the coercive arm of the government will force people to abide by its writ, I submit that the enforcement of such writ will entail costs and the same will outperform the benefits expected or estimated from such proposal. And the environment so created will be fraught with confusion and corruption. Resultantly, the collections will be much less then the anticipated estimates.
The pundits who are arguing that the proposed changes be introduced through administrative actions are perhaps not aware about the psyche of the people and the results to follow. They are perhaps disregarding the social contract between the people and the government. This social contract entails responsibilities but obligations on the part of government too. Hence, where this equation does not work, no meaningful results can be expected.
The question is why the proposed measures are being opposed and resisted? The simple answer is that the basic principles of governance were being jeopardised since long. A democratic set-up is supposed to maintain equality before the law, and the existence of an equality in the society brings an equilibrium in the market. By equity we mean both horizontal and vertical equities, or in other words we are proposing that producers and manufacturers are paying absolute wages enabling the labour to meet their needs within the framework of the existing market prices.
One observes that since long, tax reforms have been approached ad hoc, without regard to their effects on the evolution of the tax structure as a whole. As a result many parts of the system seem to lack a rationale base, and conflicting objectives are pursued at random, and even desired objectives are being pursued in contradictory ways.
Our tax system remains the product of often incoherent piecemeal changes rather than based on a strategic design. The tax system has also struggled to adapt to profound changes in the economic, social, and institutional environment in which it operates. And our tax design has not benefited as much as it could from advances in theoretical and empirical understanding of the way the features of a tax system influence the people's behaviour.
The basic question here is what the society wants the tax system to achieve and how best it might be structured to accomplish that. We will have to look at the economics of the tax system from this perspective, as it is essential for an effective working of the tax system.
The tax and related benefit system as a whole is supposed to redistribute income significantly from the rich to the poor. But have the tax and benefit reforms contributed to or counteracted against this goal? It is evident that they have counteracted as there exists a sharp increase in income inequality in Pakistan over the last thirty years or so. That is why people are not happy over the fiscal policies pursued in the last two decades as the outcome of such policies have been regressive, making the rich more rich and the poor more poor.
On the other hand, by granting exemptions, special concession, imports control and licensing, a small percentage of people were allowed to gain extraordinary benefits. And reports of misuse and abuse of sales tax refunds, export rebates, and concessions are a witness to the fact that the policies have not been used to maintain equity and equality in the society thereby causing the disequilibrium and defeating the concept of equality before law.
Furthermore, the enforcement of the basic rights of a citizen is now being questioned. Traders say that there is no safety of life and property, individuals are being abducted at gun point for ransom and shops are being looted in daylight. Even withdrawal of money or any other transaction through a bank is not safe. Government hospitals are not able to provide basic health facilities and schools lack culture, vision and learning. In this environment, business and moneymaking has become too difficult. This state of affair itself questions the effective control and governance tools of the state, and thereby the society questions the state's legitimacy to tax.
Recently, there was a news item that traders of Sukkur were agitating against tax officials. It was their point of view that roving inquiries were being made in respect of the sales tax by tax officials by issuing notices without having any basis. This news item indicates the level of confidence people have in the tax authorities.
Another pundit opined that exemptions extended under the sales tax be withdrawn. Correct, exemptions should not be there as a matter of principle. But exemptions were given to some sectors of business, because ensuing refunds of input tax were not being given and the mounting backlog of these refunds was increasing the money cost for the manufacturer, thereby affecting their competitiveness. Sales tax, mind you, is a tax on consumption and thereby you are in the midst of consumer economics and this branch of economics is dependent on the psyche and behaviour of consumers and thus at times the general concept of economics stand blurred by the behaviour of consumers. The lesson is that unless a well-thought out tax policy is not adopted, unabated taxation will not be possible.
The pundits who are now arguing to impose taxation without having it processed through the constitutional mechanism, are the agents of the beneficiary class. They have just forgotten that the constitution is a political-cum-economic document and where the balance provided by the constitution is disturbed, it leads to political unrest thereby affecting the productivity and profitability of the society and thus affecting the market mechanism adversely.
The purpose of good governance is to maximise the happiness of the people and where this ideal is not achieved the progress of society stands stopped and vandalism becomes the order of the day. It is thus important to watch the moves of those who are anti-people and support the disbalancing of the equity and equality equation in an unrepresentative manner.
I would therefore, propose that the constitutional mechanism of the decision-making must be followed, whatever the circumstances may be. The problem with the levy of RGST is not administrative, rather it is a political one. The question is what does the ordinary citizen pay to the state and correspondingly what is paid back to him? It also raises a serious question mark on the domestic and foreign policy preferences being pursued.
Where quality improvement in an individual's life does not take place, it is hard to sell harsh taxation measures. Just look around, the policies in education, health, housing and environment are not only defective but hardly portray an individual or community's wishes. In such an environment, raising taxes would be self-suicidal. (Author is an advocate and is currently working as an associate with Azim ud Din Law Associates Karachi)

Copyright Business Recorder, 2011

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