After all, the cat came out of the bag that after almost a decade of a dictatorial regime in Pakistan, the people of Pakistan hear from the elected Finance Minister that the economy was under immense pressure. But his statement is short of the accountability process against the authors of the fudged budget.
Further, if the present machinery is to continue functioning, then it is asked what measures will be taken to ensure that they will not repeat the same methods to conceal, in future, the facts from the people. He, however, said that in the circumstances, continuing with the exemptions would not be possible any more. He emphasised broadening the tax base by bringing in some more sectors into the tax net.
It transpires, from the prescription he presented for the economy, that he has not gone through the taxation plan "Vision-2016" prepared by the Central Board of Revenue (CBR) and approved by the President General Pervez Musharraf in February 2007.
The CBR Chairman, Mr M. Abdullah Yusuf had said that the tax projections were realistic and achievable, based on the economic indicators of the country. According to this vision, total revenue collection and tax GDP ratio would be achieved at Rs 4.3 trillion and 14.5-15% respectively by tapping potential sectors in the next ten years, by 2016-17, starting from the financial year 2007-08.
As was claimed, the 10-year plan was forward looking and progressive, if implemented, bringing potential sectors into the tax net through policy measures, it would have helped economic growth, reducing the burden of taxes on the low income groups and broadening the tax base by encompassing more sectors of the economy for revenue generation.
But it is a fact that successive governments have failed to broaden the tax net, as they have lacked the political will to take the measures which could bring all categories of taxable income into the ambit of the tax laws. As a result of this, the burden of the country, with 150 million people is on the shoulders of the 1.3 million taxpayers.
Pakistan is a country where hardly 1-2% population is paying tax. The tax policy of the country is such that a very big segment of highly placed people, having enormous wealth, lucrative occupations/businesses and enjoying a luxurious life, such as state functionaries, feudal lords, legislatures, corrupt bureaucrats and stockbrokers are all out of the tax net.
It is the need of the times to review this aspect of the tax policy and restructure it, based on the principles of equity, fairness and convenience of the people of Pakistan. Every one who has the ability to pay, should be made to pay tax and to contribute to the national kitty, irrespective of his source of income. The present tax system is suffering from disparities, inequality, unfairness and inconveniences at the cost of the honest tax payers.
The Second Schedule to the Income Tax Ordinance 2001 (Ordinance) is a classic example of political compromises in violation of the principles of inequality of tax policy. The said schedule exempts income from pension, encashment of leaves, annuity, flying allowance, free ration and residence and other perquisites paid to the armed forces, public servants, air forces, president, governors, ministers, judges, the legislatures ie members of the provincial, national and senate.
Thereby lawmakers have kept themselves out of tax net, but are more interested in spending the tax payer's money mercilessly on their luxurious life styles. It may be noted that all of the aforesaid sources of income are taxable in the hands of salaried class. Section 12 of the Ordinance defines salary as income inclusive of any perquisite, whether convertible to money or not, the amount of any profits, in lieu of or in addition to, salary etc. Such disparity and unfair treatment between the privileged and non-privileged class in the taxation system discourages and disappoints the honest tax payers.
The CBR should look into these existing imbalances in the fiscal system where poor people contribute more taxes as compared to the elite class. In its bid to propose new taxation measures, it should remove this disparity and bring at par all the aforesaid perquisites into the tax net.
The other classes out of the 100 exemptions allowed under the said schedule, include those who derive income from modarabas, joint venture capital, ICP, NIT, and income from capital gain (CGT), on the sale of shares of public companies, modarabas etc. The exemption of CGT on shares was allowed three decades ago since 1974. Initially, it was allowed as an incentive to encourage investment in the stock market.
The objective of the exemption of CGT has been achieved, as it has encouraged trading in the stock markets, evidenced by the high levels of index which crossed 15,000 points. But the strong lobby of stock brokers has been successful in getting the exemption of capital gain on sale of shares, modaraba certificates and redeemable instruments extended in almost all the annual Federal Budgets.
The government, under the apprehension that the stock market will be under distress; if it will not accept the proposal of stock tycoons, it, therefore, under compulsion, been extending the exemption from time to time. Although there no justification exists for the exemption on capital gain on shares, in view of the fact that the stock markets has crossed 15,000 points.
The Securities and Exchange Commission of Pakistan (SECP) agreed to a budget proposal of the Karachi Stock Exchange seeking extension in the CGT exemption on securities trading business for five years. The CBR will look into the issue whether the SEC while doing so has exceeded its jurisdiction or not. However, the SEC has admitted the fact that the economy is losing a sizable revenue by not levying the CGT on trading in the share market. Despite this, its inclination to the stock brokers' proposal is based on this reasons among others that the CGT is allowed in some countries internationally.
Though the SEC compared if to the tax exemption of the CGT in Singapore, Bangladesh, Malaysia, but it failed to compare their taxation systems with ours. Our taxation system is such that wealthy people have enjoyed all kinds of tax benefits. Besides it is suffering from distortions in many shapes, which are not present in the taxation systems in force internationally, in the countries quoted.
Moreover, exemption of CGT, allowed in UK and India, is subject to the condition of a minimum holding period of 12 months of the securities. Whereas, the Ordinance does not provide for any condition for a holding period of securities to claim an exemption of CGT. It, therefore, has encouraged short term speculative trading in the stock market and long term investment is discouraged.
Clause (110) of the Second Schedule to the Ordinance, therefore, needs to be amended (i) to provide for a minimum holding period of securities; in case of sale of securities before the prescribed holding period, the gains arising from the sale of securities, should be made taxable as is being provided u/s 62, where tax credit claimed by a salaried person on the investment in shares are disposed of within 12 months of its acquisition. The tax credit already allowed is added back to the amount of tax payable of the taxpayer. This measure will minimise the speculative trading on the stock markets.
(ii) Further exemption of CGT be restricted to small investors and (iii) where CGT arises in the nature of trade by mutual funds, stock brokers and other asset management companies, such CGT be treated as business income and be taxable accordingly, along with other business income of the company.
The stock brokers have established several mutual and investment funds. They have accumulated huge surplus funds to the extent that they have now diverted their business in the acquisition of industries, banks and real estates. Thus the era of concentration of wealth in a few hands, as once was propagated by the government, is again emerging in society.
At this critical time when our country is facing a sluggish economy, it is proper to bring this potential sector into the tax net by withdrawing the exemption of CGT, as aforesaid, allowed under the Second Schedule of the Ordinance. Surely the government would receive a positive response from the stock brokers/members as responsible citizens who would gladly contribute to the national exchequer at this critical time.
The other sector that has always remained tricky, owing to its political, social and technical implications, is the agriculture sector. It is often alleged that a strong lobby of landed gentry has been impeding the levying of tax on agricultural incomes, depriving the country of a chance to widen its tax base. Thereby, a few landlords with political clout are making merry, without fulfilling their obligations to the country.
Although the government is in principal convinced of the need of taxing agricultural income, but this powerful agriculture lobby's close links to leading political figures and the establishment's heavy weights, has defeated the moves. It is against universal principles and also unfair and illogical to make a distinction between agricultural and non-agricultural income for the purposes of taxation.
There should no complication with regard to the imposition of income tax on agriculture on a number of counts. It should be levied on the grounds of horizontal equity ie individuals in equal economics positions should be taxed equally. Second, income tax is imposed on personal income and not on the sector as a whole.
A large number of individuals connected with agriculture earn huge personal incomes, hence there is no legal or ethical grounds not to tax their incomes. Thirdly, exemption on agriculture from tax serves as a disincentive to those who pay taxes, and thus raises the possibility of tax evasion and fraud by showing income from non-agricultural income sources as agricultural income.
The CBR study reveals that if agricultural tax was computed on actual income from the sale of produce, instead of being levied on the basis of the size of the land-holding, it would generate revenue of Rs 60-70 billion, compared to the present amount of Rs 268 million, collected from all the four provinces as agriculture tax. The focus of the new strategy should be to broaden the tax-to-GDP ratio, which is one of the lowest in the region.
Besides the immunity from agricultural tax provided in the Constitution is based on a political lobby and is not justified on economic grounds. Further, section 41 of the Ordinance exempts agriculture income extensively and covers any rent or revenue derived by a person from land or building occupied by the cultivator or receiver of the rent and used for agricultural purposes.
This provision along with the Constitutional provision for immunity from agricultural income, may be considered for withdrawal to bring agricultural income into tax net. The Second Schedule to the Ordinance contained over 100 exemptions from tax, they need to be examined again to see if one can withdraw the exemptions which are not justified and more appropriately be brought in to tax net.
A committee may be constituted for the purpose. For instance it exempts profit and gains derived from electric power generation projects set up by the Independent Power Producers (IPP) in Pakistan for their entire life.
The objective of the exemption should be that the country should receive its benefit. Further, the exemption should be for a definite period, it should not be extended for the entire life of the project. If the said exemption is looked into, one certainly one feels that it is a potential sector to bring into tax net.
The Clause (132) of the 2nd Schedule should be amended to provide for a time limit to exemptions. There are other such exemptions in the 2nd Schedule, which need to be reconsidered for withdrawal to broaden the tax net.
The broadening tax net, by encompassing more sectors of the economy for revenue generation, would facilitate the government in reducing the burden of taxes on the low income group and lowering the tax rate on the poor. Besides, it would enhance the economic upliftment of the country, particularly the mega development projects. Thus, the country's dependence on foreign donors would be substantially reduced, provided that the tax payer's money is utilised judiciously, in the national interest.
The CBR would have to speedup its efforts in achieving new targets and exploiting the potential sectors. This process would require restructuring of the tax policy, keeping in view the above mentioned objectives, which are vital to economic growth, making the taxation system more judicious and equitable so that the rich and rulers pay according to their capacity. It is a huge challenge but its rewards are potentially even greater.