Increasing tax revenue

PAKISTAN needs far more financial resources than it can readily mobilize in these difficult times. Much more funds are required than what the donors are willing to offer for relief and rehabilitation of the survivors of the earthquake of October 8. While the reconstruction to be undertaken in the devastated areas will be costly, the resources available eventually are likely to fall far short of that, though spread over several years.

We have to raise our own resources to supplement the external assistance. It is not enough if the tax collection is more than last year’s or more than the targeted amount. The July-October tax collection at Rs 195.1 billion has already exceeded the target for the first four months of this fiscal year of Rs 192.3 billion by Rs 2.8 billion. It is also higher than last year’s July-October collection of Rs 166.7 billion, marking an increase in collection by Rs 28.4 billion. But such improvements in revenues are not good enough compared to the diverse needs. Far more ought to be collected in view of the economic growth of 6.5 to seven percent anticipated this year.

The IMF, World Bank and Asian Development Bank have been urging the government to raise the tax: GDP ratio. It has been around 10 per cent in recent years and went down to nine per cent in the last financial year from 9.4 per cent in 2003-04. However, the tax:GDP ratio in Pakistan does not represent the actual position. The ratio does not take into account a high development surcharge on oil and gas which, in a good year, amounts to Rs 60 billion or more.

Since the revenues from the surcharge is a fluctuating figure it is not treated a part of the ratio which is not rational. The ratio also does not take into account the provincial and local bodies’ taxes as they are not very large, although they tend to be heavy now.

The fact is that until recently the total number of federal, provincial and local taxes was 101. Since then there has been elimination of a few taxes as in the case of the wealth tax. The actual number of total taxes of the three kinds is not clear now.

One of the major sources of additional revenues can now be larger tax collection which has become essential. To begin with all tax payments should reach the government coffers, instead of 40 to 50 per cent of them going into the pockets of tax collectors, as a study undertaken by a task force headed by Shahid Hussain, former vice president of the World Bank, confirms. Between what the taxpayers pay and the government receives, there is a large gap, which has to be eliminated. The quicker that is done, the better, both for the government and the taxpayers.

Mr Abdullah Yousaf, chairman of the Central Board of Revenue while addressing a meeting of the Board, gave eight reasons for the low tax: GDP ratio. He was frank but only up to an extent, as he did not want to annoy his colleagues. He said that too many tax exemptions lowered the tax collection. That is all the more so in respect of the export sector, which is widely, tax free and marked for its hefty tax refunds.

A number of tax exemptions have been done away with. Still we are left with too many exemptions. The IMF, World Bank and the WTO advocate rapid elimination of all the exemptions. The official policy is to tax a sector heavily and then come up with liberal exemptions. An ideal economic regime is regarded as one totally free of exemptions.

Mr. Abdullah Yousaf mentioned the narrow tax base as the reason for low tax revenues. The very poor may be exempted from many of the taxes. At the same time, some of the richest in the country, like the feudal lords, are exempt from income tax. The procurement prices of wheat and several other agricultural products are raised year after year and more and more income is transferred to the rural areas. Yet the large agricultural income is exempt from income tax.

Those who are in the real estate trade and sell properties are making large profits but they do not pay income tax on their incomes, though under the law they have to declare their income and pay taxes. But this is a law which neither the income tax officers nor the beneficiaries of the real estate trade honour.

In recent years those who do share business at the stock exchanges have been making large profits and capital gains. But such incomes, which run into billions of rupees, are exempt from income tax. So the bulk of the taxes fall on the middle class which is getting more and more impoverished because it is the hardest hit by high inflation as well.

Of course, the large underground or informal economy which evades all taxes, blocks the state revenues in a big way. They don’t even have to bribe the taxation officials except when they are caught, which is seldom. The informal economy is indeed very large and is at times stated to be larger than the formal economy. The narrow tax base which excludes many incomes is a result of a political policy of the rulers of not paying taxes, while the exemption from real estate profits and capital gains in the stock exchange is the outcome of the economic policy of favouring the very rich to make as much money as they can so that eventually it may trickle down to the poor.

Mr. Abdullah Yousaf spoke of too much centralization as another reason for the low tax:GDP ratio. That is certainly true. The centre collects most of the taxes and shares them with the provinces and lends money to the local governments. The provincial governments are not satisfied with the amount of allocations made for them and demand a 50 per cent share in the total tax collection which the centre does not agree to.

If instead of centralized tax collection, the central, provincial and local governments were collecting their designated taxes, the total might be larger but there can be excessive taxation as well. The industries in Karachi complain of having to pay 40 taxes to the federal, provincial and local governments. Apart from the payment of money involved there is the exhaustive physical task of making such varied payments. Mercifully, the over-abused octroi has been abolished .

Local bodies have tremendous responsibilities but they are left with too little taxes to collect and not much of financial assistance from the provinces. Mr. Abdullah Yousaf also admitted, as he comes from the private sector, that there is a perception among the taxpayers that the collected amount of taxes is not spent according to the needs of the people of the country. Hence a developing country like Pakistan is spending too little on education, public health and environmental protection.

Although the government has decided to spend four per cent of the GDP on education, with over four million employed by the state, a large bureaucratic monolith impervious to the needs as well as hardships of the people thrive along with the corrupt police force. Since corruption is widespread at all levels of government, the people don’t feel inclined to pay heavy taxes to government from which they get very little in return particularly from the 15 per cent sales tax which people pay.

They compare their own plight in respect of transportation with the luxurious fleet of cars in which the bureaucrats and their family members travel around merrily. When it comes to corruption in the ranks of the CBR, its chief did not hit the nail on the head in a country ranked as one of the most corrupt countries in the world by Transparency International. Instead he chose to skirt around it and spoke of “administrative weakness” and “limited efficiency gains”.

It was said that if the personal contacts between the tax payers and the tax collectors is restricted, there will be less corruption in the fiscal sector. So came the universal self-declaration. To what extent that has reduced corruption in the CBR is not clear.

Anyway, with the death toll in the quake rising to 86,000, the number of injured to one lakh and the homeless to over 3 lakh, the need for larger funds has increased further. We have to mobilize more funds at home and what is good about tax revenue is that once higher payments begin, they may continue in the coming years as well. And that is what we need now.

Meanwhile, the Turkish and South Korean tax models are to be studied in detail as they had led to double digit revenue growth in their countries. We have almost the same level of growth in terms of money and not as a ratio of the GDP which has been rising fast in recent years.

High economic growth will decrease the tax:GDP ratio if the revenues do not increase correspondingly. So every effort must be made to increase the tax revenue, so that more of the indigenous resources are available for our development.

Kashmir needs help, not politics

I WAS in Parliament House when the terrorists struck last time in Delhi, some four years ago. Not familiar with the building, they could not find the entrance. Still they killed three security guards before they were shot dead.

We, the MPs of different political parties as well as independent members, were so angry with Pakistan, that had allegedly trained and harboured the militants, that both the houses, the Lok Sabha and the Rajya Sabha, insisted the government take some action.

The then BJP government rushed the armed forces to the border where they stayed put for nearly two years, confronting the Pakistan army, eyeball to eyeball.

This time, after the blasts in Delhi, India’s response made more sense. No soldier was moved to the border. No protest was lodged with Islamabad. The fallout was taken in its stride. The Indian team which was at Islamabad during the blasts to finalize the points of entry at the Line of Control (LoC) was instructed to accept Pakistan’s demand for five and not to persist with India’s stand of three.

The Manmohan Singh government appreciated the fact that more entry points would facilitate relief and rehabilitation of the earthquake victims on both sides of Kashmir. Many in Pakistan feared that the Indian team would go back. President General Musharraf himself thought that New Delhi would “haggle” over the number of entry points. So much so, he told Khaled Almeena, editor-in-chief of Arab News, published from Saudi Arabia, one day before the agreement that “tomorrow you will see for yourself what is happening — whether we are haggling or they are haggling.”

Musharraf turned out to be wrong because he did not anticipate Manmohan Singh’s anxiety not to disturb in any way the growing cooperation that was developing between the two countries after the natural calamity. Even otherwise, Islamabad has failed to appreciate the depth of India’s feelings to befriend Pakistan. People to people contact has helped change the mood and the usual tension has disappeared. Manmohan Singh has reportedly told Musharraf more than once that India wants to have the closest relations with Pakistan and jointly pursue efforts for the economic development of the region.

Indeed, it was a bold decision by the Indian prime minister to agree to five entry points when the dead bodies were piling up in Delhi following the bomb blasts and when public opinion in India felt outraged after it had responded generously to the loss in Pakistan. (New Delhi has allocated $25 million for the quake victims). Manmohan Singh stood by his words that the process of reconciliation with Pakistan was “irreversible.”

But when terrorism from across the border remains unabated what does the prime minister do to mollify angry Indian opinion? This is the question which may be bothering him. A country where the society is open and where all avenues of communication are free, it is not possible to influence people to think in a particular way. The terrorists have revived violence in the valley as well. New Delhi is bound to feel angry when the Lashkar-i-Taiba, Markaz Dawa and other Islamic outfits still operate from Kashmir under Pakistan’s control.

This is the reason why Manmohan Singh was at pains to tell Musharraf on the phone that there were “external linkages” of terrorist groups, clearly telling Pakistan to put its house in order. The same point has been emphasized by the UN and the US. The response by the Pakistan foreign office was cliche-ridden. The spokesman said: “Unless they (India) share the evidence with us, it remains a mere claim which we cannot accept.”

Musharraf was more forthcoming in an earlier statement: Pakistan was ready to join India in the probe into the attack and offered total and unequivocal support. Why couldn’t the spokesman repeat what Musharraf had said? Even if India’s allegation was a “claim,” it should not have been rejected straightaway. It would have been better if Pakistan had announced the constitution of a commission headed by a Supreme Court judge to investigate the charge of cross-border terrorism which India has alleged continuously. The proposed commission can invite New Delhi to provide evidence or even travel to Delhi to get it. India would be embarrassed if it did not cooperate.

Islamabad cannot just dismiss the religious aspect, “the jihad spirit”, which seems to animate militant Islamic groups and even Al Qaeda. Kabul has complained about it and New Delhi has pointed its finger at it. There is no doubt about the terrorists operating from the Pakistani soil despite its claim that it has banned such organizations and taken strong action against them. Islamabad will have to come out with something in the form of a visible action to prove its innocence.

The pressure of religious parties, on which Musharraf depends, is understandable. But he cannot ride two horses at the same time. Whatever internal compulsions, he will have to close down militant camps, the addresses of which New Delhi has given. Their number may have come down. But even the operation of one camp arouses the suspicion that Islamabad wants to keep the option of such an alternative open if and when it wants to rebuild pressure on India.

At this time, when both countries are in the midst of relief and rehabilitation, Musharraf’s observation in his interview that there was an opportunity to move on the political front makes little sense. Where is the time? Where is the congenial atmosphere? Where is the focused attention it requires? Both governments are busy finding shelter for thousands of people who are still living under the open sky. However necessary the talks on Kashmir may be, this is not an opportune time. Politics, quarrelsome by nature, may spoil whatever goodwill has been built so far between the two countries.

All our attention should be focused on the rehabilitation at this stage and I wish it could be done jointly, not only at the official level but also at the NGO level. The Delhi blasts have already lessened the enthusiasm among the ordinary Indians who have been sending material and money directly or through the Pakistan High Commission. Pakistan has to take into consideration India’s sensitivities. Blasts on the one hand and the revival of violence in Kashmir have poured cold water over India’s eagerness to participate.

Even if the two countries were to join hands wholeheartedly, their efforts may fall short of the daunting task that they are facing. Finding shelter, food, clothes and medicines for hundreds of thousands of people is not an easy job. According to UN estimates, tens of thousands of people might die. How odd sounds the voice for a political discussion on Kashmir amidst the cries for help and succour.

The writer is a leading columnist based at New Delhi.

Failure of integration

WHICH would you rather have in your capital city: a terrorist attack in the centre or a weeklong riot on the outskirts? After the experience of last July, most Londoners would probably be tempted to opt for the latter. The damage inflicted by the Tube and bus bombings far exceeds the cost of the recent mayhem in Paris’ eastern suburbs.

On the other hand, the perpetrators of the 7/7 bombings could be counted on the fingers of one hand. By contrast, no one knows just how many young men took to the streets of Paris last week, but there were certainly hundreds. Britain and France face roughly the same problem at the moment. But there is good reason to think that France’s is bigger.

Just what is the problem? Nicolas Sarkozy, the brazenly ambitious French interior minister, denounced the rioters as “scum” and “thugs,” having earlier vowed to “clean up” the areas where the violence took place.

This was the cue for his foes on the left to blame the trouble on Sarkozy’s heavy-handed approach to policing. Meanwhile, his foes on the right pointed the finger of blame at immigration. After all, the cars are burning in suburbs where immigrant communities predominate.

Sarkozy is, in fact, engaged in a clever piece of political triangulation. Having already bid for immigrants’ support with offers of affirmative action programmes and votes for noncitizens who are long-term residents, he now needs to send a signal to the French right that he also knows how to be tough. The real question is whether this mix of carrots and sticks is a credible cure for a divided city.

The problem is not immigration per se but a failure of integration. France has the highest foreign-born population of any European country — more than 10 per cent. Yet this is a legacy of past immigration, not present.

The French have a low immigration rate and are notably unsympathetic to those who seek political asylum. These days, most newcomers are joining family members who have been in France for years, if not decades. The trouble is, they are moving to ghettoes with miserable economic prospects. The unemployment rate among foreign-born residents is more than twice the national average, which is already high enough at more than nine per cent. Immigrants are also heavily overrepresented in French jails. Revealingly, the rioters who have so far been arrested are nearly all the sons and grandsons of immigrants. Their life stories are sorry chronicles of educational underachievement, unemployment and petty crime in benighted enclaves such as Clichy-sous-Bois and Neuilly-sur-Marne.

Immigration need not mean social exclusion. Most of the people who move from poor countries to rich countries do so with the best of intentions — to work hard and make a better life for themselves and their children.

Compared with Europe, the United States has long excelled at integrating newcomers. Not so long ago I was at a school in southern Texas, not far from the Mexican border. The day began with the entire class singing a ditty that went like this: “I am proud to be an American, be an American, be an American / I am proud to be an American, living in the USA — OK!” Deeply corny, no doubt. But these little kids sang — albeit in distinct Latino accents — with real gusto.

Longtime Americans take for granted the language and civics tests that would-be Americans have to take. But they’re not easy. One question in the official “Guide to Naturalization” is: “Who said, ‘Give me liberty or give me death?’ “ I had no idea it was Patrick Henry. My favourite sample question is:”Who helped the Pilgrims in America?” The answer to that one is: “The American Indians/Native Americans” — a fine example of the American habit of accentuating the positive.

The problem in Europe is partly economic. In free-market America, immigrants get jobs; they are not much more likely to be unemployed than workers born in the US. But the second problem is that Europeans do not try hard enough to make immigrants integrate culturally. In Britain, an English-language test for would-be citizens was introduced only last year, and only last week did they begin testing for knowledge of “Life in the UK.”

This would be progress if the test were any good. Alas, there are only two questions on British history, and they are: “Where have migrants come from in the past and why?” and “What sort of work have they done?”

The irony is that it is Americans, not Europeans, who are consumed with worry about the social consequences of immigration.—Dawn/Los Angeles Times

The imperfect storm

There is no doubt the White House is having a bad hair day (week?). Between the president’s popularity polls, the war In Iraq, the withdrawal of Harriet Miers’ nomination for the Supreme Court and the indictment of I. Lewis “Scooter” Libby, the vice-president’s aide, there is not much to celebrate.

What has happened at 1600 Pennsylvania Avenue is that a leak turned into a hurricane. The roof has blown off, the West Wing is filling with water, the vice president’s office is flooded, and Karl Rove’s credibility has washed out into the Potomac.

What to do? One of the suggestions tossed out by the damage-control team is to call in Fema, the most respected government agency in the nation.

I met with a Fema executive the other day who told me, “We’re ready. We will send gallons of drinking water, ice cubes, blankets, sleeping bags and soybeans, which were left over from Hurricane Wilma.

“The White House is in the eye of the storm, and if they don’t move now, nothing can save them.”

“Has the president asked you to rescue him?”

“He is now in the bunker next to the situation room, and we have a helicopter standing by to take him to Camp David.”

“Didn’t he know about the storm coming his way?”

“His staff knew, but hid it from him. If there is one thing Bush hates, it’s bad news.”

“But certainly he knew there were heavy storm clouds over Iraq.”

“He finally noticed the weather had turned bad, but once again, George W. decided to stay the course.”

“All right. What happened when he put Harriet Miers in a lifeboat? It sounded like another Titanic to me. Did the Marine band play ‘Nearer My God to Thee?”’

The storm caught him completely by surprise because the wind came from the right and not the left, which had originally been predicted. Once the surge hit the White House, we had no choice but to put Harriet out to sea.

I said, “The newest disaster was when Hurricane Scooter hit the White House with Category 5 winds.”

The Fema exec said, “It could have been worse. If Hurricane Karl had struck at the same time, damage would have incalculable. By the way, Karl is still out there and might make landfall at any moment.”

“What is Fema doing now?” “We’re battening down the hatches and asking Congress for more money to pay for Iraq, New Orleans and legal fees that any indicted people in the White House might need.”

“Is the Red Cross helping?”

“It is asking Republicans to donate blood instead of giving money. The administration can’t get enough fresh blood now.”

I said, “There is some speculation that the White House can’t survive anymore hurricanes.”

“That is just another example of media frenzy.”

“Does the White House still have power?”

“They have not lost power yet. How much they can generate in the next two years is anybody’s guess.” —Dawn/Tribune Media Services

Subsidy junkies

INTERNATIONAL talks to reduce agriculture subsidies and other trade barriers — which could give an unprecedented boost to poor countries — are heading for the buffers.

Earlier it looked as though Peter Mandelson, the EU trade commissioner, had negotiated a united EU offer to cut CAP subsidies by 71 per cent and farm import duties by 60 per cent over a long period.

Even though these offers are not as big as they seem — they involve switching subsidies from products that are highly trade distorting to ones that are only moderately so — it was nevertheless a united front with which Europe could talk to the rest of the world, and thus get the Doha round of trade talks — suspended for more than two years because poor nations refused to carry on until rich ones agreed to a level playing field for farming — under way again. Once again France is holding up progress. Its farming lobby, small in numbers but huge in political clout, refuses to give up lucrative subsidies, even though the resulting overproduction shuts third world countries out of business.

It is disabling for the EU that a policy that is agreed by nearly all its 25 member countries can be stymied by farmers in one country. And it is even more disabling for the world trade talks that a group of subsidy junkies in just one country can derail an entire global effort. It is ridiculous to maintain a system that devours $48 billion a year from an EU budget that ought to be putting cash behind the industries of the future, not those of the past.

—The Guardian, London

In Ayaz Amir’s column last Friday, in para 7, the price of the 70 F-16 aircraft to be bought from America is five billion dollars and not five billion dollars each, as erroneously printed. The error is regretted.