July 7, 2003	Monday	Jumadi-ul-Awwal 6,1424

What the Finance Minister Shaukat Aziz merrily describes as the tax of the future - general sales tax has in fact become the fiscal burden of the people and is standing in the way of adequate economic growth.

In the new fiscal year which began on July 1, out of the total tax revenues of Rs510 billion, Rs 223 billion is to come as sales tax revenues. And that is more than 40 per cent of the total revenues.

In the fiscal year gone by, out of the total tax revenues of Rs454.5 billion, Rs 191.7 billion came as general sales tax, while the revenues from income tax was only Rs149.3 billion. In fact, because of the over projection of the sales tax revenues, actual collection last year fell by Rs 6.1 billion.

As the GST goes on increasing its spread and brings more items and services under its cover of 15 per cent tax it is becoming more and more of a deterrent to investment, trade and economic growth.

The businessmen have hence been pressing President Musharraf to help reduce the tax to promote investment and stimulate economic growth. He is reported to have agreed to do that in principle, and asked the finance minister to look into the possibility of reducing the GST.

After Shaukat Aziz had become finance minister, based on his global knowledge of taxation systems which have been modernised, he had said there would be only three taxes - income tax, customs duties and sales tax. But the only notable tax which vanished following that assurance was wealth tax which was an irritant to the middle income groups in particular. The excise duties still remain, through their number has been reduced, particularly through the new budget.

We still have far too many taxes. And apart from the money involved, the system of paying and accounting is very vexatious.

While the income tax rates have not really come down in Pakistan the sales tax has been going on a mighty sweep, bringing more and more items under its aggressive wings. That means while an average citizen does not get real relief from income tax he has to pay more and more of the left over income as sales tax. Hence his real income has become smaller than before, while the governments kitty has been getting larger and larger.

The fact is that not only an increasing number of goods services have been brought under the sweep of the sales tax but also the rates have been going up. They rose from 10 per cent in the earlier days to 12.5 per cent and then to 15 per cent. And there are items of which the tax is 18 per cent and then 20 per cent, which are said to be penal provisions or to make up for tax exemptions.

In the East Asian countries, the sales tax is three to six per cent. In Singapore, it is three per cent and hence visitors hardly try to claim refund at the airport as they leave the city state. In the US it is around eight per cent which is a state tax. In Pakistan, the issue is not only of paying high and varied taxes but also getting no service from the government for the separate payments expected for each service. And when you pay for your water and electricity you don’t get them. And that makes the tax payers more frustrated and wild at times.

When one studies the investment prospects in a country, he looks at the rate of taxation, power rates and interest rates. And where the law and order is bad, these three things have to be made far more attractive.

That is not what has been happening in Pakistan. Interests rates have come down and investors with a good track record can borrow all the money they need. But electricity rates are very high and electricity break downs are frequent and prolonged. And the law and order situation remains unpredictable.

All over the Western world when the economy enters a recessionary phase, as it did by the and of the 1990s in the U.S., the taxes are reduced and interest rates slashed. Hence the Federal Reserve in the US has come up with the lowest interest rate in 45 years.

And President Bush has come up with a tax relief package which may eventually cost upto $360 billion. That has made the surplus budget of the U.S. into a deficit budget, but for him industrial resurgence and job creation are far more important than a manageable budget deficit.

And now Germany is doing the same at it seems to enter a deflationary phase. On the day President Musharraf landed in Germany Chancellor Gerhard Schroeder announced major tax cuts which will cost the government $20.5 billion. He had already announced large tax relief which was to come into effect in 2005; but he wanted to move ahead fast because of the talk of deflation in Europe’s largest economy and reduced the maximum of income tax rates from 48.6 per cent to 42 per cent and the minimum rate from 19.9 per cent to 15 per cent. He would cut subsidies and other concessions to stay within the three per cent GDP budget deficit which the euro region demands to the extent possible.

Announcing the relief the chancellor said: “We want the signal of revival to go from this week end to the people of our country” with a 10.6 per cent unemployment rate vis a vis 8.7 per cent unemployment for the euro region. But in Pakistan, the IMF would object to tax relief, particularly in the sure income sales tax, as the year gone by was the first year after many in which the tax revenues are almost equal to the targets prescribed.

The IMF, World Bank and Asian Development Bank would give more money for poverty reduction and development outlay than agree to reduce the tax revenues and increase the budget deficit from the four per cent of the GDP targeted for the current year.

Hence, President Musharraf is reported to have agreed to have a minimum of taxes possible to encourage investment which alone can promote large- scale employment. In the U.S. and Germany, the leaders have to think of the next elections or even regional elections or by-elections. In Pakistan the leaders have no such fears. They are either fixed or follow a traditional pattern with the feudal lords or tribal chiefs winning most of the seats.

If we had real elections, the leaders would be very much concerned with the massive unemployment problem instead of taking it lightly. In the Pakistani system, those who can not get elected to the National Assembly can get virtually nominated to the senate and become ministers thereafter. Some even buy their seats.

Investors argue that if the law and order situation cannot improve soon, further fiscal concessions have to be given to the investors, particularly when power is so costly and the supply too uncertain. Admittedly the cost of doing business in Pakistan is high, partly due to extensive corruption. So, the World Bank and the Asian Development Bank are coming up with large funds for civil service reforms, judicial reforms and CBR reforms so as to reduce corruption and increase official efficiency. But this is a long haul. But such reforms are essential not only to promote investment but also the well-being of the country as a whole.

Meanwhile, the government has done away with excise duty on cables and wires and on paper and paper boards. And it may do away with the excise duty on paints or reduce it to help the construction industry. That will indeed be a welcome development. And helpful to the over-taxed paint industry as well.

The member for central excise in the CBR says all the unnecessary excise duties would be done away with and only those taxes on items which are injurious to health would be retained. How long would such steps take to become a helpful reality to promote the various industries?

A young man unemployed for long says he was starving most of the time. When he got employment and went to eat his lunch at a restaurant there was the demand for paying 15 per cent sales tax. But when he was starving, the government did not care. It is a grabbing government and not a giving government, he laments. Now clearly when a man has to pay 15 per cent more for everything he buys, he will buy less, the traders sell less and the factories produce less. That is how the economy shrinks or remains stunted and unemployment spreads. Hence the hefty sales tax needs careful scrutiny instead of being kept at 15 per cent and spread to new items and economic growth undermined.