Prevalent form of taxation is tantamount to extortion: Shabbar Zaidi

BRR: Banks' have been subjected to higher tax rate on capital gains and dividend earnings. What is your view on the resulting differential in rates charged to banks and others for similar transactions?
Shabbar Zaidi: When a bank buys shares in the stock market it will be subjected to 35 percent capital gains tax while a broker will be subjected to much lower rate (10-15 percent). This difference has created an arbitrage opportunity. It is true that the banks have been making lots of money in lazy banking.
But if the government wants to rake in more tax from the banks, it should be done by simply raising the income tax rate applied to banks, even though that rate is already higher than the rate all other companies are subjected to. But the government has opted to apply different tax rates to the same transaction for banks and others and that has created an opportunity for arbitrage.
BRR: The Finance Ministry has defended this decision by asserting that it will discourage lazy banking this way. Would you agree?
SZ: The question is about what are the means that are used to reach the desired end. If the government wants to direct the banks to lend to the private sector, it could achieve that objective by setting ADR requirements. Why is the government trying to achieve that end through taxation?
This is the domain of the central bank and it would be well within the domain of the State Bank of Pakistan to set limits on banks investing in stocks or lending to public versus private sector. But again, the problem is that the main focus is on making enough money through tax to meet the FBR target, not to stimulate the economy.
BRR: All bank transactions are now taxable at 0.6 percent withholding. How do you view this measure?
SZ: The decision to charge 0.6 percent withholding tax on all bank transactions is not based on any economic policy; it is an easy way to drum up collections without chasing after those who are not paying tax on their incomes.
Consider a simple example of a tax payer who transfers money to his spouse's account. That transaction will be taxed if the spouse is not an active filer, even though the person that earned the money already paid his dues on it! It is an accountant's way of maximising collection.
And again in the case of the new tax on excess reserves of publicly listed companies, the government has introduced a measure through the Finance Bill, when it should have come through changes in corporate law, if at all.
BRR: The tax on excess reserves has drawn wide spread criticism. What changes do you anticipate to this tax in the Finance Bill 2015-16?
SZ: In my view, this is a mistake just as it was a mistake when similar tax was imposed in the previous PML-N term. Further, I am sure that it will be altered in the bill before passing into law. The modification will have to be that the tax will not apply in case a company pays out at least 40 percent of its net income for the tax year in dividends.
BRR: In his budget speech, Finance Minister Ishaq Dar said that differentiated tax rates for filers and non-filers has delivered good results and that is why this differential has been raised further. Do you also see these good results?
SZ: This is a fallacy. There is no mentionable growth in the list of active tax payers. Collection may rise but it is not mindful of any concept of equitable redistribution. The main problem with this approach is that it is not taxing income; instead we are applying plethora of presumptive and transactional taxes.
BRR: Do you think we are moving towards equitable taxation and distributional equity through this budget?
SZ: Not at all. Our economy has four main sectors; manufacturing, services, agriculture and trade (retail and wholesale). Within the services sector, there are two segments; documented and undocumented. Currently the brunt of the tax burden has been placed on the manufacturing sector and the documented segment of the services sector.
It is inevitable that economic activity will shift from these sectors to the other sectors that are relatively unburdened by taxes. No wonder publicly listed companies hold little charm while the undocumented economy is flourishing.
BRR: What should be the government's approach towards tax collection and documenting the economy?
SZ: Macroeconomic indicators are heading in a positive direction; however private sector's contributions through taxes and investments have to be escalated in order to address national goals of distributional equity. The government does not have money to ensure social spending because the private sector is unwilling to pay its dues. This is a vicious circle that has to be broken.
One way to do that is borrow money and pour it in to the economy to set it churning. The other option, which in my opinion is better, would be to come in with major tax reforms even if it stalls the economy in the short run.
The banks are conduits for all transactions in the economy. Currently, people who don't pay taxes have the following avenues for stowing away their money: plots of land, developed property, foreign currency, jewellery, stock market and cars. There is no law that requires registration of owners of these assets. If the government wants to get serious about documenting the economy, it should make it mandatory to document ownership of all these assets.
In my view, this is a 3-4 year exercise. If government goes after each of these asset classes in successive years, within a short time span we can see a dramatic improvement.
BR Research: Salaried individuals often complain of tax tyranny while other groups pay virtually nothing. What is your opinion of the country's prevalent system of taxation?
SZ: Economic policy has to be derived through academicians, policy wings of political parties, representatives of businesses, and the Planning Commission. Unfortunately, in our society all three are missing. These three segments provide the policies that are then weighed, debated and implemented through the Parliament.
Taxation is one part of the economic policy that has to be derived thus. And the policy for taxation has to be cognisant of economic realities and based on the aspirations of the common man. If, as in our society, the tax collector is entrusted with the task of devising tax policy also, then the economic purpose of taxation is lost to the objective of ensuring ease in maximising collection.
Ultimately, it is the government that should spell out the policy. The role of the Federal Board of Revenue (FBR) should simply be to collect taxes. The fact that the tax collector is dictating taxation policy is our major problem. Facilitation of the taxpayer is not. The budget cannot simply be a financial document; it has to be a reflection of our economic policy.
Taxation is supposed to create distributional equity in a society. The prevalent form of taxation is tantamount to extortion because it is unmindful of whom it is being collected from.