The finance minister in his budget speech last year had announced that following achievement of macro- economic stability “we now have to adopt a mare radical approach to make a quantum leap into a high growth trajectory”. Consistent with the announcement, the budget 2005-06 announced on June 6 is undoubtedly, growth- oriented so as to keep up the momentum of growth in the next financial year in order to achieve the projected target of seven percent.

Graduating from macro-economic stability to the growth goal, the policy appears to be on right track. Poverty reduction will only be possible by improving average income of the people and not by totally placing reliance on social development as a means to arrest poverty.

With the growth objective in view, the budget contains a number of proposals. These include slashing of corporate tax on banking companies, private companies and public limited companies to 38 per cent,37 percent and 35 per cent respectively.

By raising profitability, it will encourage plough back of profits for fixed investment by existing companies and channel private savings and credit into fixed investment rather than in speculative investment, witnessed during last couple of years.

Exemption of custom duty on basic raw materials used by chemicals, pharmaceuticals, textiles, furniture, confectionary and soap industry will also help increase production. Zero rating of sales tax on imports and supplies and exemption from custom duty of raw material used by our export industries, namely, textiles, carpets, leather, surgical and sports good industries will help make these industries competitive in the international market and thereby boost export.

The proposals such as withdrawal of five per cent custom duty on import of urea, a reduction in duty from 20 per cent to 15 per cent on tractors, exemption from the duty on imported agricultural machinery and poultry feed- making and poultry meat processing machinery and other proposals contained in the budget will help boost agricultural production.

While the budget does contain incentives aimed at increasing production, there is hardly any evidence of measures aimed at discouraging investment in speculative business. Without these negative measures on speculative investment, the positive measures contained in the budget are likely to be offset if the rate of returns on the investment in productive sectors are less than in speculative business.

There are at least two distinct speculative areas, namely, land and property and trading in shares on stock exchanges which have been attracting investment since a couple of years as the returns on them far exceed the returns on investment in agriculture, industry and services sector. However, these have been left out altogether from imposition of taxes.

Instead a recourse has been taken to raise revenues from taxation on financial instruments and cash transactions. The budget proposes 7.5 per cent excise duty on fees and commission charged by banks from services for letter of credit, guarantees, broking and foreign currency dealings. Furthermore, excise duty of 7.5 per cent is also proposed to be levied on account of lease management fee, documentation fee and processing fee at the time of executing lease agreements.

Taxation on financial instruments and cash transactions is considered to be worst type of taxation in public finance for a number of reasons. Firstly, taxation on financial instruments and transactions raises the ‘cost of money’ and delves deeply into interest rate policy which exclusively falls within the purview of the central bank and not the Ministry of Finance.

Any imposition of tax, as such, on financial instruments interferes with the autonomy of the central bank of regulating the interest rates. Secondly, imposition of tax on transactions in formal financial sector raises the cost of such transactions forcing the clients to move away from ‘formal’ financial sector to ‘informal’ financial sector. Thirdly, it discourages household savers from depositing their savings in the formal financial sector. Fourthly, taxation on financial transactions defies the policy of documentation of the economy.

Are we trying to encourage informal economy to grow further in Pakistan through these measures and reverse a trend of financialization of transactions in the formal sector? Perhaps, a review of these measures will help us save positive effects of the measures contained in the budget for the growth of the economy.

The question that arises is how to make up loss of revenues due to withdrawal of these measures. The answer is obvious- to tax speculative business in land and property and stock trading. An imposition of capital value tax/capital gains tax on land and property will not only drive away the funds from speculative trade to productive channels of investment but will help raise revenues to the government without damaging fundamentals of the economy that the government has tried to build over time. The capital gains tax on land and property is in vogue in all developed counties – be it USA, UK or France. Why should we be shy to impose it?

The other source of revenue can be through an increase in the capital value tax on purchase of shares in stock exchanges from 0.01 per cent to a level that the net capital formation through floatation of new companies, offer of right shares etc is not adversely affected.

Perhaps, the government has shied away from increasing the rate of CVT due to a decline in the index witnessed since, 17th March, 2005 from a level of over 10,000 to around 7,000 to-day. The issue to consider is whether or not index level above 10,000 or the present level of around 7,000 satisfies a sound economic and financial analysis. If it transpires that the index at 7,000 is pitched at a level higher than what the economic and financial analysis reveals, then why should the government be reluctant to increase rate of C.V.T?