June 12, 2006	Monday	Jumadi-ul-Awwal 15, 1427

NOW, when the budget 2006-07 has been announced, people from different walks of life have started questioning the rationale behind the introduction of three new taxes.

They wonder why has the government’s much talked about resource mobilisation programme ended by deciding to collect additional taxes worth mere Rs15 billion during the next financial year.

The government thought it fit to bring the real estate business into tax net by imposing two per cent capital value tax (CVT) on the value of land and urban immovable property. But why this tax will not be applicable on commercial property is a question being asked by common man who believes that rich have been exempted.

The withholding tax on cash withdrawal above Rs25,000 from banks has been enhanced from 0.1 percent to 0.2 percent. And then the government has doubled the withholding tax and CVT on the stock exchanges from 0.0005 per cent to 0.01 percent.

The CVT on the stock exchange transactions has been raised from 0.01 per cent to 0.02 per cent. Generally, it is believed that the CVT would discourage retail investors and that by doing so, the government would not get the targeted Rs2.9 billion during 2006-07.

Various reports suggest that due to doubling of CVT and the rumours about it on the eve of the budget, stock market has crashed and investors have lost billions. Also, investors are withdrawing their money from the stock market. Many suspect that this could be a ploy to force the government to withdraw this CVT on shares.

Interestingly, the government did not levy wealth tax and the capital gains tax continues to be exempt till June 2007. The capital gains tax had been removed by late President Zia- ul Haq and now the wealth tax has been done away with by President Musharraf. Both the officials and the private sector admit that due to these new budgetary measures, the share of the direct taxes has reduced while the share of the indirect taxes has increased.

“The focus should have been on increasing the direct taxes but it appears that there will be an increase in indirect taxes”, said former director of Pakistan Institute of Economic Development (PIDE) Dr A.R.Kamal.

One senior official says that by avoiding to increase direct taxes and enhancing indirect taxes, the government is moving from progressive to regressive tax system. “This is not good economics”, he said alleging that people were being burdened0 with more and more indirect taxes.

Many hoped that the rate of general sales tax (GST) would be reduced from 15 per cent to 10 per cent as was proposed by the Board of Investment (BoI). It was also anticipated that the government would come up with strong measures to increase the share of income tax in the next budget by bringing more and more people in the tax net. The government says that it would continue to encourage voluntary assessment scheme for income tax.

According to the government’s own figures, out of 150 million population, there were only 1.2 million registered tax payers.

The CBR’s tax-to-GDP ratio is likely to be increased from nine per cent to 9.4 per cent by June 30 this year. This, by all international standards, is far less and should be at least 13-14 per cent, if not 17 per cent as in case of developed countries.

Also, people have been asking why successive governments avoided to tax agriculture incomes and this time too the administration is believed to have succumbed to the pressure of the agriculture lobby which made it believe that, by taxing effectively the farm incomes, the PML would not win the 2007 general elections. No doubt, the agriculture income tax is a provincial subject but the federal government is not known to have made any move to persuade the provincial governments to deliver. Late Dr Mahboobul Haq used to say that the landed gentry earns Rs600 billion annually but it does not pay even Rs10 billion taxes. Insiders maintain that some of the budget planners had proposed to the government to bring into the tax net the agriculture income who get away scot-free. They argued that it was the long outstanding demand of the industry that tax on agriculture income should also be imposed and that the government should not favour the agriculture lobby.

Prime Minister Shaukat Aziz is believed to have favoured the idea to step up collection of tax on agriculture incomes. But eventually the idea was once again abandoned apparently to please the agriculture lobby.

An official of the Planning Commission says that whatever had been published in the newspapers was taken care off by the government. “You were saying that stock market and real estate sector should be taxed, the government listened to you. And you said that there was a rising poverty, the government came up with relief measures. You said that government employees and pensioners needed an increase, the government followed it. In a nutshell, the government tried to appease every sector in the budget”, he said.

Chairman CBR Abdullah Yousuf, however, did not believe that there would be any distortions in the tax structure with the levy of three new taxes. When approached, he said it was the demand that tax on property should be imposed and that stock market, under-taxed, should also be properly taxed. “And this is what we have done with a view to broaden the tax net”, he elaborated.

He said speculation in stock market was causing problems that needed to be looked into. He did not see any real crash in the stock market and said it was all their pressure tactics to avoid being taxed. Under the Constitution, provinces are supposed to levy tax on agriculture income and not the federal government”, he argued.