GAT: a penalty on savings!

While the Finance Minister continues to insist that no new taxes will be introduced in the forthcoming budget, a high-profile Economic Advisory Council (EAC) to be convened soon by Dr Hafeez Pasha is reported to have different and disturbing ideas. According to reliable sources, the EAC is all set to recommend to the government the imposition of Gross Asset Tax (GAT) on moveable and immovable assets in 2012-13 budget in a bid to bring wealthy people of the country into tax net.
Such a proposal is based on the premise that rich people, in general, are just paying peanuts to the national kitty and there is therefore a need to shift burden of taxation towards direct taxes by reducing reliance on indirect taxation. At present, over 68 percent share of total revenues is collected through indirect taxation while the share of direct taxation is restricted to just over 30 percent. It may be added that direct taxation in this country does not fully qualify to be defined as such as revenues from taxes like presumptive tax are also included in this category. The Sindh government, it may be recalled, had asked the Centre at the time of budget preparations last year to revive Wealth Tax on assets of rich people in the aftermath of severe floods but this proposal was not accepted by the Federal government at that time.
It looks improbable that PPP-led regime would pay much attention to the EAC's proposal in this regard because of its declared policy of introducing or imposing no new taxes in an election year but the recommendation, as such, has the backing of vast majority of the ordinary people and is often a subject of intense debate among various analysts. As such, it cannot be dismissed out of hand. In fact, the proposed GAT is roughly another form of Wealth Tax which remained in vogue for a long time in the country and was discontinued following a lot of criticism from the business class. It was very rightly argued that wealth tax promoted consumption and was anti-savings, anti-investment and anti-growth.
The rich people, making fortunes through hard work, who were also paying their taxes honestly and employing a lot of people in their enterprises often found it difficult. Some of the entrepreneurs who did not want to be bothered by this disgraceful exercise even preferred to relocate themselves to countries where tax systems were transparent and conducive to industrial activity. Wealth Tax was finally discontinued in the Musharraf-Shaukat regime on the basis that such a tax created a lot of problems for the business community and the honest taxpayers, but did not contribute much to the national exchequer. The withdrawal of this measure was of course appreciated by richer sections of society but still continues to be a debating point in various circles. The criticism has often centred around the inability or lack of willingness on the part of the government to tax total assets of affluent classes of society without realising that direct taxes are generally imposed on incomes rather than on wealth.
The debate has taken a somewhat new turn after the 18th Constitutional Amendment under which immovable assets are now under the jurisdiction of provincial governments and the Centre would not be able to impose taxes on such properties. The EAC is reported to have asked the Ministry of Law to give its opinion on the subject. In our view, however, the EAC must concentrate its efforts more on maximising the potential of existing tax measures and check rampant evasion rather than indulging in grey areas which have no great promise and could scare away investors who are already contemplating fleeing the country due to obvious reasons.
The EAC must also ponder over the point whether the present government or the incoming government would have the necessary resolve to tax all the immovable properties of the country, including agricultural lands, on a uniform basis. If it is not possible. There is, therefore, no justification for increasing the existing inequity in taxation by increasing tax burden on the documented sectors in urban areas further particularly when the government finds itself unable to tax rural property and the informal sector. Anyhow, it is still to be seen whether the incumbent government would be inclined to consider the asset tax proposal but, in our view, the time is not yet ripe for adopting such a measure. The Finance Minister is right when he says that there should be only two taxes - income tax and sales tax - in the country.