The taxation proposals identified by the panel of economists led by Dr Hafiz Pasha under the 'Short term Home Grown Stabilisation Programme: 2008-2010' submitted in October 2008 are said to have been completely ignored by the Federal Board of Revenue (FBR), depriving the government of projected revenue to the tune of Rs 75 billion.
Analysts told Business Recorder here on Friday that some of the major taxation proposals of the panel of economists including capital gains tax (CGT) on properties by provincial governments, farm tax, Indian type of services tax and levy of excise duty on non-essential consumer goods/ durables were never considered by the FBR.
The panel of economists had issued a comprehensive report on the taxation measures which were estimated to generate Rs 75 billion through (i) imposition of Capital Value Tax (CVT) on immovable properties to be devolved to the provinces and converted into a Capital Gains Tax (CGT); (ii) GST on all services to be reverted through straight transfer to the provinces even if it continues to be collected by the Federal Board of Revenue (FBR). The power of the FBR to collect the CVT on property has been transferred to the provinces. However, no decision has been taken for the imposition of the CGT on properties despite huge revenue potential as pointed out by the panel of economists.
According to the report, the panel recognised that many revenue mobilisation measures recommended would have their full impact in the medium term. Nonetheless, implementing them as part of the stabilisation package will begin to capture revenues and will also send the right signal regarding sharing of the burden of adjustment.
Analysts believe that short-term measures like Presidential Ordinance for imposition of 15 percent surcharge and increase in special excise duty from one percent to 2.5 percent might have been averted in case important proposals of the panel of economists had been considered by the government. Proposals like CGT on properties and Service Tax on the pattern of India were never even discussed at the level of the Board-in-Council of the FBR. Thus the government did not give due importance to home grown stabilisation programme with key policy measures on the documentation of the economy as recommended by the Panel of Economists.
According to sources, the taxation measures announced in budget (2010-2011) generated an amount of Rs 30.4 billion during July-January (2010-2011) against the projected figure of Rs 83.3 billion, reflecting a shortfall of Rs 52.9 billion. This clearly reflected that most of the taxation measures taken in budget (2010-2011) were not viable as evident from the data of the FBR.
The panel of economist had recommended broad basing to tap under-taxed sectors through the levy of Service Tax of the Indian type on key services like import cargo handling services, custom house services, general insurance, banking and other financial services, etc. The proposal was never considered by the tax managers.
According to the data available on the website of Directorate of Service Tax, Mumbai, there is a substantial growth in the assessee base from 3943 numbers in 1994-95 to 1307286 as on March 03, 2010. The total number of taxable services has also increased from 3 in 1994 to 117 as on July 31, 2010. During 2010-2011, Indian tax authorities have planned to intensify the field survey operations to ensure that all taxable service assessees are brought into the tax net and Service Tax due from them are collected without hitch. It has been estimated that the target (budget estimate) of Rs 68000 crores of service tax collection for financial year 2010-11 would be exceeded. The service tax would reduce the tax burden on international trade (Customs duty) and domestic manufacturing sector (Excise duty). Successful integration of goods and service tax, would give India a world-class tax system and will bring in improved tax collection. In a way, it will boost the economy and enable India to compete at the global front. As a result, the Indian system will eventually match the international standard in the sphere of indirect taxation. It will also end the long standing distortions of differential treatments to the manufacturing and service sectors. The effort to prepare for a smooth integration with the GST without any hardship to public is a big challenge, that needs to be handled at the field as well as policy level, Directorate of Service Tax India added.
The panel of economists had also recommended that the government could mobilise additional resources of 1.5% of GDP by 2009-10 through reduction of thresholds for sales tax and corporate income tax, levy of a higher minimum corporate income tax on turnover, higher excise duty on non-essential consumer goods and durables like ACs, refrigerators, etc. Contrary to this, the FBR has proposed to enhance the registration threshold from Rs 5 million to Rs 7.5 million.
The report had proposed reduction in the registration threshold to bring maximum persons into the documented regime. Against the recommendation of the panel of economists, the FBR proposed to increase the registration threshold upto Rs 7.5 million under the reformed general sales tax (RGST). At the same time, the FBR simply ignored the proposal of enhancement of federal excise duty on luxury items.
Other key proposals of the panel of economists which have not been considered by the tax managers include capital gains tax on properties by provincial governments, withdrawal of exemptions/concessions, especially in Second Schedule of the Income Tax Ordinance 2001 and development of agricultural income tax (especially following the current increase in procurement prices, bringing them close to international prices) by the provincial governments.
Experts said that the focus of the FBR is to withdraw sales tax exemptions and zero-rating instead of withdrawing income tax exemptions of the Income Tax Ordinance 2001 having direct revenue implications.
The panel of economists further recommended increase in tax rates through the imposition of regulatory duty on non-essential imports (where essential imports include POL products, edible oil, wheat, pulses, fertiliser and medicines). The proposed rate is 4% on machinery and 8% on other imports. Of course, imports on which regulatory duty has already been imposed are excluded from this proposal. Equating top marginal rate of income tax with the corporate tax rate and enhancing the rate on private companies would promote corporatisation.
According to the report, the success and credibility of a targeting system depends on the ability of the state to: a) identify the poor/vulnerable in a credible, reliable, transparent and verifiable manner; b) reach the target group efficiently and cost-effectively; and c) maintain the ability to monitor progress dynamically so as to graduate those who do not need help anymore and enroll those who may have fallen into bad times.
It further recommended that the rebates should be between 10-15% of invoice value. Furthermore the duties on imported raw materials and semi finished goods for these sectors should be eliminated. This policy intervention is in line with the one pursued successfully by the Chinese over the last decade, the report added.
The report further said that the indirect tax collections have been buoyant while the growth in direct taxes has been disappointing. The high rate of inflation and the large increase in the rupee value of imports have clearly helped in raising indirect tax collections. The lack of buoyancy in direct tax collection is, however, an indicator of emerging problems in the corporate sector of Pakistan.
Within the resource mobilisation strategy, the primary thrust has to be on broad basing the taxation system through withdrawal of exemptions or taxing more the under taxed sectors. Enhancements in tax rates should be considered essentially as a temporary expedient, only if they contribute to greater progressivity of the tax burden and/or reduce imports, it added.