April 7, 2003	Monday	Safar 4, 1424

Strong ministerial voices are rising to add to the clamour for a substantial tax cut to promote corporate investment — the weakest link in the economic revival of Pakistan. They are no ordinary ministers but the powerful Ministers for Commerce, Humayun akhtar, and for Iindustries and Production, Liaquat Jatoi, who have been calling for tax reduction from the day they became ministers in the present set-up.

They have been joined now by the Advisor on Investment and Privatization, Dr Abdul Hafeez Shaikh, who has called for an investor friendly fiscal policy and a reduction of the high taxation.” He belongs to the World Bank and as finance minister in the Sindh government was after far higher tax revenues from Karachi.

Dr Hafeez Shaikh now not only wants more fiscal concessions for investors but also better law and order and other facilities which can win over investors around the world.

All these ministers feel the economy has improved well enough to make concessions to the investors. They have also taken note of the fact that the revenue collection in the first nine months of this year ending March 31 at Rs308.2 billion is 15 per cent more than the revenue collection in the same period last year, and the CBR is likely to achieve its full revenue target this year.

They feel that reasonable fiscal concessions to the investors now can make them invest more, and add to the revenues of the country later.

But this demand has come at a time when 55 tax exemptions are to go before the new budget becomes effective from July 1 after about 50 other exemptions had gone earlier following the insistence of the IMF.

The IMF has called for the exemptions to go, including the tax exemption on income from national savings schemes in the name of simplifying and stream-lining the tax system. The IMF is also firm that no new fiscal concessions should be given so that the revenue collection would not go down and the budget deficit would not increase.

But Mr Liaquat Jatoi has been talking of substantial fiscal concessions for investors in the new Export Processing Zones like Gwadar and many others where special areas are to be allotted to the Chinese investors as well as to the Japanese and Koreans. Even Advisor to the Prime Minister on Finance Shaukat Aziz says the immediate future of the country depends on the success of such EPZs which are meant to promote exports in the manner China has been doing.

So will the fiscal move of the government in this area prevail or will the will the of the IMF prevail?

Mian Mohammad Manshah, the textile and cement king, who also controls the Muslim Commercial Bank, has also called for fiscal concessions for the “real sector” to become more productive. He says the monetary policy of the government has resulted in large increase in money supply and the rate of interest has come down substantially. He now wants the tax rates to come down so that the real sector” could be fully productive.

The IMF now wants the CBR focus on the richer among the tax-payers who can pay far more taxes. It wants the CBR to explore the possibilities of getting more taxes from those who use credit cards for large transactions, owners of significant shareholdings, holders of bank accounts with substantial balance, frequent international travellers in the business class, owners of luxury or high value assets including builders, doctors etc., and also the CBR use the information received from other countries under double taxation agreements. The CBR had tried to probe into such areas in the past but without notable success as they are usually powerful individuals or groups.

The IMF also wants imposition of capital gains tax on share transactions at a time when share prices are high and large transactions take place. But this is a time-bound concession upto June, 2004 which may not be amenable to immediate cancellation.

Mr Shaukat Aziz has said there would be no new taxes in the new budget, but the IMF has suggested a 15 per cent general sales tax on computer items as well as specified machinery. This too will stir up a major controversy.

The fact is that taxation in Pakistan is not too high since the peak of personal and corporate taxation came down to 35 per cent, but there are far too many taxes, and tax on tax with the 15 per cent sales tax capping it all. The middle class is under a heavy tax squeeze. And what is far worse is there is too little return to the people for all the heavy taxes they pay.

They are not sure either how much of the money they pay reach the government and how much goes into the pockets of the taxation officers. According to Mr Shahid Husain, who headed the task force on CBR Reforms, 40 to 50 per cent of the money paid as tax by tax-payers goes into the pockets of the taxation officers.

The fact is the higher the taxation the larger the evasion and higher the corruption as the evaders and the taxation officers collude. The IMF now wants the corrupt CBR officials to be dealt with by the National Accountability Bureau and the taxation officers to be rid of their discretionary powers.

The higher the taxation in any country, the larger the need for exemption in many crucial areas. And that is all the more needed in a developing country. But unfortunately once an exemption is given it is too dificult to take it off as the resistance to it can be too strong.

But, Higher investment is imperative now to expand the economy and accelerate its growth not only to provide the much needed employment but also to boost the revenues to finance the greatly starved social sector.

Apart from the federal ministers the Governor of the State Bank of Pakistan, Dr Ishrat Husain, has also pleaded recently for a reduction in the maximum rate of taxation to 25 per cent from 35 per cent. And that was his well considered pronouncement as that is the need of the hour.

Now an IMF report says the ratio of tax collection to GDP is low in Pakistan even compared to many of its neighbours. While arguing that tax-GDP ratio in Pakistan in the year 2002 was only 12.8 per cent compared to the far better performance of more developed countries like Thailand and Malaysia. India has a 14.9 per cent ratio the report says but until recently India had a lower ratio than Pakistan’s, around 11 per cent.

While the IMF study may be correct in respect of the relative figures of various countries in the region, the extent of corruption in Pakistan in the tax collecting machinery and relative corruption in other countries has not been estimated. As far as the people are concerned they pay the taxes, and as far as the government is concerned a large part of them do not reach the official coffers.

Both the IMF and the CBR want to simplify the tax payment system and make it easy for the people to pay the taxes. A big tax payers unit has been opened in the city to accommodate the corporate tax payers which seems to please the big payers. What about the rest?

If self-assessment is to become the norm for paying taxes the payment system should be made simple and non-complicated. The CBR says it is doing that in the new budget due in June. But between what the CBR promises and what is does actually there is usually a large gap. That gap should be as narrow as possible if self-assessment is to be a success. Finally before the government withdraws the 55 tax exemptions as proposed, or many of them, it should cut the tax rates as the ministers have been suggesting.

We cannot have a situation in which the many good tax exemptions go, while the high and numerous taxes stay, not only to exasperate the people but also prolong the economic stagnation and investment slow-down.