ARTICLE (June 04 2010): The collective failure to act prudently creates certain things as fait accompli in a nation's life. The Value-Added Tax Act 2010, ready to be imposed in the coming financial year on the dictates of the International Monetary Fund (IMF) as a precondition for release of the remaining tranches of Stand-By Arrangement, is Pakistan's fait accompli.
Since the posting of the draft VAT laws and rules at the FBR's website, many conscientious writers, analysts, participants of TV talk shows, representatives of industry, traders and tax bars have highlighted their deficiencies and possible disastrous effects, but the government remains unmoved knowing well that beggars cannot be choosers. The Adviser to Prime Minister on Finance (soon to become Finance Minister) has been claiming persistently, "we are not dictated," in fact, "it is in our own best interest". Everybody knows what has forced the government to impose on us an alien piece of tax legislation. But our real cause for concern is its quality. This is the worst specimen of legal draftsmanship we have ever come across after Income Tax Ordinance, 2001, promulgated by Musharraf under similar circumstances in 2001.
We have decided not to section-wise analyse the proposed VAT laws and rules for two reasons: one, these are not even worthy of any comments being totally hopeless, and secondly being fait accompli these are irreversible, thus pinpointing deficiencies, anomalies and dichotomies would be an exercise in futility. The government and the FBR are helpless as the proposed laws were prepared on the dictates of the IMF by some foreign experts (sic), who have neither expertise nor any insight into the mundane realities of Pakistan.
They simply handed these laws and rules to Shaukat Tarin, then "independent" and 'brilliant' finance minister of our "sovereign" state. However, we should not blame the IMF and/or the World Bank. We went to them for loans/grants. If we cannot put our house in order, we must not blame others for our own wrongdoings!
Dr Hafeez Shaikh, while addressing a pre-budget seminar in Islamabad on May 29, 2010, categorically said that the VAT would be implemented from July 1, 2010. He was kind to tell the nation that it would not be levied on edible items for retailers below the threshold of 7.5 million. The VAT, the Adviser on Finance said, would not only increase revenues, but ensure documentation that would also help the authorities to tax the actual income of businessmen. He rightly pointed out that "this is the reason why big businessmen are criticising the VAT". He said, "If businessmen are law-abiding citizens of the country, they will not find VAT difficult for them and those who still want to remain outside the documentation will continue to criticise it".
Hafeez knows well about vested interests, who are opposing the VAT due to ulterior motives. He conceded that the VAT would increase tax-to-gross domestic product ratio in its first year only by 0.5 percent, but hoped that with the documentation of the businesses through the VAT, more income tax will be generated. The same argument was advanced when the GST in the VAT mode was introduced in 1996, but the results after fifteen years of imposition are before everyone.
Dr Hafeez has touched the core issue. It is tragic that rich and mighty do not pay personal taxes in Pakistan. The governments - civil and military alike - lacking political will, abstain from taxing the ruling classes but keep on extorting more money from the poor. Taxpayers' money is wasted ruthlessly by the people, who matter in the Land of the Pure. Resultantly, more and more borrowing - internal and external - is resorted to, to meet fiscal deficit. The lenders legitimately ask for fiscal discipline and impose conditions, but we criticise them rather than improving our policies and systems. Most of the ills are due to our own malpractices, corruption, inefficiency, apathy and mismanagement - though we keep on shifting the blame on outsiders under the garb of conspiracy theories, which is our best national pastime. This is the vicious circle in which we are caught for the last many decades.
Instead of blaming others, we should use taxation as a potent instrument to shape and influence our socio-economic policies. Taxes are the main instrument for transferring resources from private to public use. By designing an appropriate tax structure, resources can be raised from those who are holding them idle or squandering them on luxury consumption.
The actual tax potential of Pakistan - by a very conservative estimate - is not less than Rs 4 trillion during the fiscal year 2010-11. If the next year target is fixed at just Rs 1700 billion or even less, it will not help improve tax-to-GDP ratio [presently below 10%] or diminish fiscal deficit [feared to exceed Rs 800 billion mark]. The main reason for this pathetic state of affairs is existence of monstrous parallel economy. Unless the government cracks down on undocumented economy and seize assets created out of untaxed money, we cannot improve the tax-to-GDP ratio to desirable levels. It is high time that the tax evaders and avoiders, rich and mighty, exempted and privileged are brought into tax net. At the same time, the government needs to cut the monstrous size of its machinery or at least make it efficient with 50% cut in expenses currently incurred on it.
Equity demands higher taxes from those, who have higher income and wealth, but in Pakistan since 1991 all the policies have decreased tax burden on the rich but increased its incidence on the poor. Revenue worth trillions of rupees was lost by extending unprecedented exemptions and concessions to the rich and the mighty. Progressive taxes eg wealth tax, estate duty, gift tax and capital gain tax etc, were abolished gradually. These were replaced with indirect, regressive taxes that have disastrous impact on the poor. The VAT will be another move in the wrong direction.
The following steps at the Federal level will help generate revenues of over Rs 4000 billion:
-- Introduction of excess profit tax to counter cartelization of industries. The unscrupulous politicians-cum-industrialists, through this process, have minted billions of rupees by fixing prices of flour, sugar and cement. Thus by taxing their excess profits, revenue of not less than Rs 250 billion can be generated.
-- Taxation of speculative transactions in real estate and capital market. The potential is nearly Rs 400 billion.
-- Re-imposition of Wealth Tax Act, 1963 that was abolished through the Finance Act 2003. In 2002 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemptions given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US $60 billion) started pouring in from all over the world remitted by all and sundry without any fear of being investigated, courtesy amnesty given under Section 111(4) of the Income Tax Ordinance, 2001. Influx of enormous wealth was directed to the stock exchanges and real estate market where sharks continued to engulf the small investors through unholy manoeuvrings. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity. From 2003 to date, according to a conservative estimate, we have lost Rs 200 to 350 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life.
-- Elimination of section 111(4) of the Income Tax Ordinance, 2001 as it protects tax evaders. They can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in his account after paying a nominal premium of 1 to 2 percent of the entire proceeds! The loss caused due to this provision annually is nearly Rs 150 billion.
-- Taxation of property income at normal rate. In the last two years alone, revenue loss on account of taxing income from property at reduced rate is about Rs 180 billion.
The above are just a few areas showing how much tax losses we have been incurring annually. The government does not need to go for the VAT as economy is in deep recession. It should rather reduce the rate of GST to 5%, but levy should be across the board without any exemption on all goods and services. It will generate more revenue. Leakages and corruption in tax departments should be eliminated. If we adopt these measures simultaneously, there will be no need for any borrowing at all.
The rich and the mighty should be taxed according to the established norms of democratic dispensation and the tax machinery is made effective, completely insulated from outside pressures and influences. We can easily collect Rs 4000 billion in 2010-11 that would be sufficient to meet all the current and development expenditure. If we can collect this much of taxes, there will be surplus budget and we can pay back loans quickly. It will help reduce the huge sum required for debt servicing that is over 45% of total revenue collection at the moment.
(The writers, tax lawyers and authors of many books, are visiting professors at the Lahore University of Management Sciences.)
Source: http://www.brecorder.com/index.php?id=1064549&currPageNo=1&query=&search=&term=&supDate=
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment