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| March 31, 2007 | Saturday | Rabi-ul-Awwal 11, 1428 |
A deadly conundrum
Women must be enabled to vote
Need for capital gains tax on shares trading
Split for purpose?
IN THE last two years the stock market index has jumped from around 6,000 to over 11,000 this month with market capitalisation shooting up from Rs.1.7 trillion to three trillion rupees, indicating that a capital gain of more than a trillion rupees accruing to holders of listed shares escaped taxation because of a specific tax exemption for capital gains arising from trading in listed securities.
TWO very poignant remarks were made by Saudi King Abdullah bin Abdul Aziz at the Arab League summit meeting in Riyadh on Thursday: that Iraq’s occupation by foreign troops was illegitimate, and that blame for disunity among Arabs lay with their rulers. “Our constant disagreements have made the Arab nation lose confidence in our sincerity, and lose hope,” said the Saudi monarch. The king’s frank assessment of the situation in Iraq and the Middle East as a whole should be seen against the backdrop of the consequences of Iraq’s long occupation. It also represents the Arab people’s desire to see an end to occupation of Arab lands by Israel, and that of Iraq by foreign troops. On Iraq, the sentiment is shared equally by the US Congress and the Senate. However, the Bush administration was swift to dismiss the Saudi assessment of the situation. The American view also found resonance in the opinion expressed by the participating Iraqi foreign minister, an ethnic Kurd, whose community’s empowerment is seen by Sunni dissidents in Iraq, rightly or wrongly, as a result of the occupation of their country by foreign forces. The hurriedly cobbled together and American-backed Iraqi coalition government has failed to arrest the raging violence. The subsequent rise to power of Shia religious and Kurd ethnic forces backed by the West has made Iraq a hotbed of sectarianism and Al Qaeda-driven terrorism. The once empowered and secular Sunni minority has been sidelined by the extremists. Not a day passes without attacks on innocent civilians, which are motivated equally by sectarian hatred and revulsion for the US-led occupation. The country stands dangerously radicalised as never before.
Iraq today knows no peace. The two basic objectives set by the Bush administration while going to war against Saddam Hussein, namely, instituting democracy and rebuilding the war-ravaged country, have been hamstrung by events on the ground ever since Iraq’s occupation began in 2003. The estimated number of civilian Iraqi deaths so far varies from 60,000 to over half a million; and that for occupation forces has crossed the 3,000 mark. The failure has led even the staunchest of American allies, Britain, to drastically reduce its troops from 46,000 in 2003 to a virtual token presence of 7,000 troops today, which is expected to be reduced further to 5,000 by June next. By comparison, US troops’ numbers have dwindled from 150,000 to about 100,000 in the corresponding period. A number of coalition partners have completely withdrawn their troops. In Washington, the US House of Representatives and the Senate have passed a bill asking the government to withdraw US troops from Iraq by March 2008. Predictably, President Bush has threatened to veto the bill, reflecting the blind arrogance with which the US policy on Iraq was devised and has since been pursued by the neoconservatives in the government.
King Abdullah’s call for unity among Arab leaders must be heeded by all those who claim to represent the community of Arab nations. They must also give a firm deadline for the withdrawal of occupation forces from Iraq and prepare a plan for the governance of that war-ravaged country in the immediate aftermath of the occupation troops’ withdrawal. Failing this, only anarchy and possible dismemberment await Iraq. If that happens, it will further weaken the Arab cause in the Middle East, namely, the establishment of a Palestinian state and the end of Israeli occupation of Arab lands.
HARDLY a day goes by without saboteurs attacking police posts, railway tracks, power stations and other state installations in Balochistan. On Tuesday night, for instance, power supply to 37 grid stations was suspended after four high-transmission pylons were blown up in Bolan district. Almost half of Balochistan was without electricity for long hours, with Qesco staff refusing to carry out repair work until their safety could be guaranteed. While the full-blown insurgency may have gone off the boil, it is obvious that resentment against the government continues to simmer in a province where there is no shortage of arms or of those willing to take them up, however misguided the cause. The seeds of militancy are deeply embedded in Balochistan’s hostile terrain and the unbending psyche of the nationalists, and it will take more than promises to overcome decades of distrust. Urgent affirmative action is required to bring the people of the province, many of whom feel like aliens in their own country, into the mainstream of national life. Unfortunately, progress on this front continues to be impeded by what is clearly a catch-22 situation: lasting peace can be achieved only through socio-economic uplift, but large-scale development work cannot commence in earnest without a cessation of hostilities. For the welfare of the people of Balochistan, and the sake of the federation, this deadly conundrum has to be solved quickly and with honesty of purpose.
There is no loss of dignity in talking to the enemy. Since the Mushahid Hussain committee’s short-lived parleys with the late Akbar Bugti, only ‘like-minded’ sardars and politicians have been deemed worthy of approach by the Centre and its representatives in Quetta. While this may have been understandable in the heat of the insurgency, a more flexible policy must now be pursued. Limiting the ‘benefit’ of dialogue to those who agree with Islamabad serves no purpose whatsoever in the current scenario. All representative sections of Baloch opinion must be taken on board to arrive at a solution that is seen to be equitable by all stakeholders. Otherwise, the province will continue to be plagued by conflict, neglect and deprivation. All of Pakistan will be the loser.
IT should come as no surprise that women were not allowed to vote on Thursday in a by-election in Bannu. But it is reassuring to know that despite this illogical prohibition passed by ‘tribal elders’, some women still went out to cast their votes. One would have expected that the ‘elders’ had learnt a lesson from last year when a similar move was made in Dir and the Supreme Court had taken note of it and promised to take strict action against anyone who stopped a woman from exercising her right of franchise. Clearly, no lessons were learnt from that episode. But it is still not too late to take action against those who disallowed the women from voting. What is very important, however, especially since this is an election year, is to ensure that this does not happen again. Those who do not want women to exercise their political and legal rights must be made aware of a woman’s right to participate in all aspects of life, including decision-making at various levels. If they still threaten to disallow women from voting, the government must take action against them. It simply cannot afford to remain laid back in this or similar other matters involving the basic rights and interests of women. Incidents like these, which in the past have been ignored, all add to the Talibanisation of society, which is a very real threat now. It must be nipped in the bud.
A major part of the problem lies in the government’s inability to integrate these outlying areas into the national mainstream. People do not have access to good schools, nor do they have gainful employment opportunities. That explains the widespread prevalence of ignorance and fanaticism in these areas. But that does not absolve the government of its responsibility to ensure that women can — and do — vote.
Hence, the decision of the government to continue to extend the tax exemption on capital gains arising from trading in listed securities has once again demonstrated that economic policies are not just skewed in favour of the rich but are also speculator-friendly, disincentivising investments in the real sectors of the economy. Not surprisingly, this decision is encouraging excessive absorption of resources in asset trading with no worthwhile gains in terms of productivity of the real sectors of the economy.
That parts of the manufacturing sector have done well has been because of the consumption-led growth, thanks to the availability of consumer financing, the extraordinary protection provided by the import tariff structure to a significant chunk of it (that is, to those assembling motor vehicles and motor-cycles) and because of the increased volume of purchasing power in the hands of those who have done rather well in recent years from untaxed transactions in listed shares and real estate.
In a country where the distribution of assets is so heavily skewed compared to the distribution of incomes and there are no taxes on either deaths or gifts (and wealth tax has also been withdrawn), the continuing exemption from taxation of the massive capital gains in recent years from trading in shares has huge implications for widening inequalities between the affluent and the less privileged segments of the population. However, owing to growing public pressure and in the search for more revenue enhancing instruments, a levy in the form of small tax on transactions (on the value/sale price) in listed shares has been introduced to address the demands for equitable treatment of incomes from various sources.
It is too early to make a definitive judgment on the contribution of this measure in achieving the professed objectives for introducing this instrument, mainly because there is no information on the realised or accrued gains on transactions in shares and who are the main beneficiaries of these gains to see if there has been any notable impact of the change.
On grounds of equity all incomes or any enhancement in economic power, irrespective of their source should be subjected to the same degree of taxation. Hence, there is little justification for excluding from taxation capital gains arising from trading in shares, since for the vast majority of those trading in these securities, the gain should really be treated as ordinary income.
One of the main arguments (other than the bizarre demand of brokers accepted by government that the stock market needs continued support through such measures for its development!) for exempting capital gains is that profits of companies are subjected to taxation and the dividends paid out from these profits have already been taxed. And profits after tax are either distributed in the form of dividends or are retained by the company, which then get reflected as an increase in the value of the company’s shares – that is, as capital gains.
Hence, it is argued that taxing either dividends or capital gains from trading in shares when company profits are taxed amounts to double taxation. The trouble with this argument is that on account of different tax breaks and exemption schemes the effective income tax rate is lower than the actual, official, rate.
Another argument for exempting capital gains is that it can only be levied after the gain has been realised, thereby disincentivising realisation, creating a locked-in effect. This, therefore, discourages efficient use of resources and inhibits risk taking and investments. The holder of such shares may hold onto them although if, they were to change hands and go to those that value these assets more the resources, would be utilised more efficiently and effectively.
The capital appreciation in the values of shares does not simply reflect the retained after-tax profits of companies but also expectations of future profits. Thus a fair proportion of the capital gain is in the nature of simply a bonus for shareholders. Admittedly, there will be problems implementing a concept of broad-based, comprehensive income tax since it will not be easy to value all assets at the beginning and at the end of each year, as we discovered during the era of wealth tax, especially because of the problem of taxing unrealised gains on the capital appreciation of assets. Hence, income tax systems generally followed by different countries function on the principle of taxation of income only when it has been realised. Taxation of incomes and exemption of capital gains from taxation creates an incentive to dress up or treat ordinary income as a capital gain to avoid tax.
Even conceptually the difference between income and capital gain is somewhat vague because the shorter the accounting period the easier it would be to characterise income as a capital gain -- a classification that would become blurred over a longer period, all capital gain becoming ordinary income by disposition and character.
At present in the US capital gains are taxed at 15 per cent (for taxpayers in the lower income brackets it is five per cent). Canada, Australia and the UK levy a capital gains tax on realization with adjustments for inflation. Capital incomes are taxed at a low rate because of the mobility of capital in a globalised world while there is a more progressive rate for income from labour. There is also the concern about the double taxation of savings and problems of measuring income from capital for the purposes of taxation.
However, it needs to be accepted that dividends and capital gains being two sides of the same coin should be treated similarly for tax purposes. A globalizing economy has its constraints in terms of the degrees of freedom that a country enjoys in structuring its tax policies and to be able to access funding from external donors or global capital markets with all of them examining whether norms of prudent fiscal behaviour are being adopted.
However, not taxing capital gains either of the short-term or long duration variety, as is the case in India, is inconsistent and illogical if dividends continue to be taxed at 10 per cent. In this writer’s view both should be treated similarly.
THERE are all sorts of reasons for redesigning the machinery of government in Britain, but at heart they are usually political: the search for an appropriate role for a hard-to-place colleague (John Prescott's Department for Environment, Transport and the Regions or, in an earlier era, George Brown's Department of Economic Affairs); a statement of political intent (the Department for Work and Pensions, linking in- and out-of-work benefits); or to create a stir (such as the out-of-the-blue announcement of a Department for Constitutional Affairs).
The decision announced on Thursday to split the Home Office, creating a new justice ministry that absorbs the DCA (where pay and conditions are still being negotiated after the last reorganisation), has some advantages.
But the secrecy of planning for change, a deadline that looks more political than practical and the pall of confusion still shrouding who does what, all suggest its first objective is evidence of action, even if it comes at the cost of delaying the intended benefit of a sharper focus on fighting terrorism.
The details behind the announcement betray battles lost and concessions made in the turf wars that have raged around Whitehall since the home secretary first announced his plan (to the media rather than his department or cabinet) in January. The Foreign Office, to which MI6 will continue to report, and the Cabinet Office, where Sir Richard Mottram will continue to coordinate security and intelligence, both retain significant responsibilities in counter-terrorism strategy; new cabinet and ministerial committees will have the job of trying to make sure everyone actually talks to each other.
The ministry of justice has long been seen as a way of splitting the function of catching criminals from sentencing them.
But the Home Office will still be responsible for core elements such as crime reduction and antisocial behaviour, as well as immigration and identity, prompting fears in the judiciary of more pressure on sentencing from a Home Office that does not have to find the funds to pay for it. And, curiously, the home secretary remains responsible for what he calls the "struggle of ideas and values" — an area that might be expected to fall in the remit of the Communities and Local Government department. Blurred accountabilities make for blurred lines of responsibility.
Divorcing the component parts of the Home Office might lead to a more concentrated focus, but it risks coming at the expense of joined-up government.
There is a particular irony that these changes should be announced on the day that MPs on the Department for Environment Food and Rural Affairs select committee slated Defra and particularly its former secretary of state Margaret Beckett and permanent secretary Sir Brian Bender - both of whom the MPs thought should resign - for the disastrous introduction of the single farm payment scheme. This botched programme bears many of the indicators of a typical Whitehall cock-up, of which a lack of communication within the department was but one.
Others, all familiar from failures before and since, included the rushed introduction of a complex and overambitious project, and an untested IT system. Most tellingly, work on the scheme began soon after the department itself was created from bits pulled together from across Whitehall after the old Ministry of Agriculture itself failed so disastrously to contain the 2001 foot-and-mouth outbreak.
There are plenty of reasons for calling the vast and diffuse Home Office dysfunctional. But its problems have been bad management, poor internal communication and a lack of leadership, complicated by an excessive legislative burden and too-frequent changes of minister (and, arguably, senior officials). Adding a hasty, underprepared and unfunded restructuring risks discrediting the good bits of the reorganisation and, most seriously, undermining its specific objective of providing better protection for the citizen.
— The Guardian, London