Taxation and evasion

THE World Bank has always been pressing Pakistan to increase its revenues so that it does not have to depend on large long- term loans from international lenders. In the earlier days when the GDP of Pakistan was low, the tax ratio was low to the GDP. It was 9-10 per cent of the GDP. And when the GDP increased, the tax ratio was still the same which was highly unsatisfactory for the bank. Now the tax GDP ratio is again 12 per cent, which is making the bank to press for a rise in it.

This has been happening despite the taxation reforms, introduced by the bank at a cost of 150 million dollars, headed by Mudasir Khan. Now the World Bank wants the Central Board of Revenue to do away with tax exemptions and waivers so that every citizen pays the tax expected of him. When the taxation rate is heavy and stands in the way of exports or promotes smuggling, the government comes up with either short-term waivers or long term exceptions. But the World Bank has been opposed to such deviations and insisted on full collection of the taxes levied. The result has been hundreds of SROs which the businessmen find too vexatious.

Now the World Bank is of the view that since the economic growth rate is high and had touched 8.6 per cent last year, it should reflect in larger tax revenues and higher investment for development. But what usually happens is when the GDP rate goes up and the revenue collection does not reflect that growth, the tax-GDP ratio goes down and this is what is happening right now.

An analysis of the revenue picture shows that on one side there is the tax revenue due to the government, if it is fully and honestly paid by the tax payers, received by the taxation officials and deposited in the treasury. On the other side, tax receipts are small. What happens in between is that a part of the tax due to the government is hidden by the taxpayers and evaded.

Secondly, a part of the payment made by the taxpayers goes into the pockets of the taxation officials as bribe and hence the net receipts of the government become smaller. A task force on taxation set up under the chairmanship of former vice-president of the World Bank Shahid Hussain showed that 40 to 50 per cent of the money paid by the taxpayers go into the pockets of the revenue officials. Hence, the revenue which reaches the government treasury is small. The solution he suggested was universal self-assessment which has now come into force.

But that does not mean that the big taxpayers pay their tax in full. The payment of taxes for 2004-05 fiscal year showed that a great deal of amount had been evaded by business firms and hence the total revenue collection has been much smaller than expected. That has alarmed the Asian Development Bank and the World Bank which have called for remedial measures. The fact is that businessmen can’t have their cake and eat it too. If they want self-assessment to be honoured by the taxation officials they should declare their total income and pay taxes in full due to them. Otherwise the taxation officials will have to look into their declared income with a great deal of care and recover the hidden revenues.

The government on its part has to keep the rate of taxation moderate not only to encourage businessmen to pay full taxes but also to reduce corruption to the maximum possible extent. The number of taxes — federal, provincial and local — which until recently was 101 has come down but not enough to make the taxation system work smoothly.

A low level of import duties and other taxes on imports has become imperative to prevent the massive smuggling. The average import duties have come down to 25 per cent from around 140 per cent ten years ago. Smuggling is still taking place on high-duty items, so it has become essential to reduce such taxes so that smuggling becomes unprofitable.

Until recently the cost of smuggling was 22 per cent and it was argued that if the average rate of import taxes was brought down below 22 per cent, smuggling would cease. But the government does not want to lose too much too soon as officials are accustomed to a high level of taxation.

Now a low level of trade taxes has become essential to keep export products competitive in the international market following the WTO regime and when the Safta (South Asian Free Trade Agreement) comes into operation from 2006, many of the duties will have to be reduced if not abolished for good.

Tax exemptions and waivers become essential for exports when the cost of production in the country is high and the cost of doing business inclusive of the cost of corrupt practices is also high. When energy costs are high, water is scarce and transportation costs are excessive, the government has to come up with duty waivers if not total exemption from some of the taxes.

Wages in Pakistan are low. Foreign investors say the productivity of the Pakistani labour is also very low as it is uneducated and untrained. So, labour costs in terms of productivity are high. Tax exemptions and waivers become essential in such a context. The sugar industry provides the best or worst example, as sugar cane has to be bought by the mills at a high price. Sugar costs a great deal in Pakistan and shortages are frequent and when there is a surplus the sugar cannot be exported without a large subsidy which is abhorrent to the public. Hence there is perpetual crisis in the sugar sector and eve the large imports don’t seem to fill the void and stabilize prices.

What it shows is that distortion in one area leads to distortion in several other areas and an industry which should be an asset to the country has become a liability which defies all solutions. The price of sugarcane cannot be brought down as the sugarcane growers have a big political pull and their demands are partly supported by irregular water supply and occasional drought. Same is the case in several other sectors.

The high price of energy in the country plus irregular water supply along with a high transportation cost make many industries push up their prices. And to bring down the prices for export to international level the government has been forced to come up with duty exemptions or waivers. If such waivers have to be avoided, the whole economic system should be organized on a rational basis after making careful and realistic cost studies.

On the other side we have a boom in the real estate prices as well as on stock exchanges with the Karachi Stock Exchange-100 crossing 8500 again, but the tax gains to the state are too small and nil in the area of real estate. It may be difficult to reorganize it on a rational basis quickly but the government has to try hard to rationalize the system instead of a two-step forward and one step backward type solution.

The trend in the world is towards eliminating distortions and disparities in the economy and we too will have to follow the same pattern in near future.

An equation with Israel?

CONTRARY to general belief, contact between Pakistan and Israel goes back to the years soon after independence. Pakistan is an important member of the OIC. It is also a nuclear power. It also realizes that Israel has a strong lobby in the US and can offer Pakistan an opportunity to play an active role in the Middle East peace process.

Evidence suggests that in 1917 the Muslim League had registered its view through a resolution on the declaration by Lord Balfour regarding the establishment of a Jewish homeland on Palestinian soil. Concern was enunciated on the capture of Jerusalem by British General Allenby. This resolution was adopted by the tenth session of the Muslim League in Calcutta on December 1917.

In October 1937, in his presidential address to the 25th Muslim League session in Lucknow, Mr Jinnah declared that in “consonance with the rest of the Islamic world, the Muslims (will) treat the British as an enemy of Islam if the latter fails to alter its present pro-Jewish lobby in Palestine.”

Coming to the subject of contacts, one Zionist leader, Chaim Weizman, evolved a strategy to isolate the Palestinian question from Indian politics. In 1931, he met Maulana Shaukat Ali. It was the first direct contact between the Indian Muslim and Jewish leaderships. This and other instances of contacts between the Israelis and the pre-and post-partition Muslim leadership are included in a research paper by P.R. Kumaraswamy “Beyond the veil: Israel-Pakistan relations.”

In September 1945, Zafarulla Khan, the future foreign minister of Pakistan, visited Palestine. Before the visit, he met Chaim Weizmann who had advised his links in Jerusalem:

“— See to it that (Zafrulla Khan’s) stay in Palestine, and his contacts with our work, are made as interesting and as agreeable as possible.”

In January 1948, months after partition and before the creation of Israel, Chaim Weizmann wrote to Zafarulla Khan, drawing a parallel between Pakistan and the future Israel.: “Many problems will be common to both of us and it is my earnest hope that it may be possible for us to deal with them together and in cooperation for the good of both of our peoples.”

Other important Pakistani leaders, besides Mr Zafarulla Khan, were sympathetic towards Israel. They also facilitated interaction with the Israeli political leadership, officials and diplomats. Such Pakistani leaders comprised Liaquat Ali Khan, Ayub Khan, Yahya Khan, Ziaul Haq, Zulfikar Ali Bhutto, Nawaz Sharif and Benazir Bhutto.

The meeting points of Israeli and Pakistan diplomats included Rangoon, Kathmandu, Tokyo, Lagos, Ankara, Tehran, Caracas, Ottawa, Brussels and Rome. On April 7, 1952, in New York, political counsellor Gideon Rafael and Eban (Israel’s permanent representative as well as ambassador in Washington) met Pakistan’s ambassador A.S. Bokhari and discussed pro-Israel statements made by Zafarulla Khan.

Again on January 14, 1953, both Israeli diplomats met Pakistan’s foreign minister in New York and discussed the issue of Israel’s recognition by Pakistan. The policies of the Pakistan government in the mid-fifties were most pro-western. Soon after the ceasefire in Sinai, the Pakistani high commissioner and Israel ambassador M. S. Comay met at a party in Ottawa on December 23, 1956. The Israeli ambassador sent the following dispatch to his country.

“The Pakistan high commissioner... came up to me, shook me by the hand and warmly congratulated me on the wonderful show your splendid little army put up in beating the Egyptian. His only regret was that the British and the French had intervened. Otherwise we might have gone to Cairo.

“He hoped that a way could be found some time of procuring a modus vivendi between Pakistan and Israel and thought that Turkey was in the best position to bring it about...”

Some archival record is available which pictured Mr Zulfikar Ali Bhutto’s contact with Israelis in his early political days. In September 1957, Mr Bhutto accompanied a delegation led by then foreign minister Sir Feroz Khan Noon to the UN where he met some Israeli foreign officials.

In March 1958, when Gen Ayub Khan became Pakistan’s president, Mr Bhutto led a delegation to Geneva on a UN conference. There he met and dined with his Israeli counterpart Shabtai Rosenne. Both had met previously. Rosenne recorded the events.

“...Bhutto does not conceal his dislike for the Arabs or how he despises the way they conduct their political affairs. His attitude towards us seems to be that... Israel is a political reality and it would be in Pakistan’s interest to recognize this fact....”

Following the Soviet invasion of Afghanistan in 1979, the Israelis started an overt political agenda with Pakistan. Regular meetings between Pakistani and Israeli officials were held and, according to Channel-2 Television, the two sides were almost on the verge of forging diplomatic relations.

In the mid-eighties when it was rumoured that Israel could launch an air attack on Pakistan’s nuclear facilities at Kahuta, Ariel Sharon sent to Islamabad his senior aide Avvraham Tamir who dispelled Islamabad’s fears and even concluded arms deals with the then president Ziaul Haq.

In late 1992, a group of Pakistani businessmen reportedly visited Israel to discuss business opportunities. In an unusual development in 1994, an official of an Israeli publication disclosed that over 300 Pakistanis had visited Israel during 1993. The same year, when India decided to normalize ties with Israel the Pakistani ambassador in Washington, Abida Hussein, caused an uproar when she announced, “If the parties to the (Arab-Israeli) dispute resolve their differences, Pakistan will recognize Israel.”

While visiting Israel in November 1993, the Nepalese agricultural minister Ram Chandra Poudel disclosed that Nepal had indirectly brokered relations between Israel and Pakistan. In February 1996, Pakistan’s then interior minister visited the Philippines. He met the Israeli intelligence community’s top brass during a counter terrorism conference. General Babar requested Israel to help out in dealing with violence in Karachi.

In 1997, a religious party leader Maulana Ajmal Qadri visited Israel. Upon his return he said, “In the larger interest of Palestine, Pakistan should recognize Israel.” In August 1997, the Israeli media reported on a delegation of religious leaders from Pakistan who spent a week in Israel and met Israeli foreign ministry officials.

In September 1997, General Mirza Aslam Beg declared, “Pakistan has no direct differences with Israel... We have no dispute with Israel, therefore we should not hesitate in recognizing Israel.” In the same month, before visiting the US, Nawaz Sharif’s media spokesman Mr Sadiq ul Farooq declared that there was no harm in Pakistan recognizing the Jewish state.

In October 1998, Israeli media reported a meeting between Ezer Weizmann, then Israeli president, and his Pakistani counterpart Mr Rafique Tarar in Ankara. Tarar approached Weizmann and shook hands and said: “I have heard a great deal about you as a man of peace... one day we will meet again.”

Our state and political leadership have a long history of quietly pursuing policies that contradict their public stance. But now, we have come out in the open, perhaps because it is in our national interest. Days after it was created, the Jewish state made a formal request for acceptance. We refused. But now, we should recognize Israel, on our own terms.

The writer is a member of the National Assembly

Whistling past the fault line

EARTH, that living, seething, often inhospitable and not altogether intelligently designed thing, has again shrugged, and tens of thousands of Pakistanis are dead.

That earthquake struck 10 months after an undersea quake caused the December 2004 tsunami that killed 285,000 in Asia. Americans reeling from Hurricane Katrina, and warned of scores of millions of potential deaths from avian flu, have a vague feeling — never mind the disturbing rest of the news — of pervasive menace from things out of control. Too vague, according to Simon Winchester.

His timely new book, “A Crack in the Edge of the World: America and the Great California Earthquake of 1906,” teaches — reminds, really — that we should have quite precise worries about the incurably unstable ground on which scores of millions of Americans live. This almost certainly will result in a huge calamity, probably in the lifetime of most people now living.

Before the study of plate tectonics revolutionized geology just 40 years ago, that science, Winchester writes, was concerned with “rocks, fossils, faults and minerals that were scattered around simply and solely on the surface of the earth.” But the surface consists of between — depending how they are defined — six and 36 floating plates, which Winchester calls “rafts of solid rock.” The plates’ slow movements are powered by Earth’s molten innards, the boiling and bubbling radioactive residue of the planet’s formation 4.5 billion years ago.

The plates grind against — and slide up on, or plunge below — one another. But not smoothly, which is the lethal problem. When friction freezes them for a while, stupendous energy builds up until, suddenly, plates unlock and the energy is released, sometimes in ways that seem to involve related spasms around the world.

On the last day of January 1906, that seismically dangerous year, an earthquake in Ecuador and Colombia of perhaps 8.8 magnitude on the Richter scale killed about 2,000. Sixteen days later there was a large Caribbean quake, followed five days later by one in the Caucasus, and on March 17 by one that killed 1,228 on the island of Formosa. On April 6 a 10-day eruption of the volcano Vesuvius began with rocks blown 40,000 feet into the air over Naples. Two days after Vesuvius subsided, San Francisco was knocked down, and 2,600 acres of it were then devoured by three days of fires. About 3,000 San Franciscans died then, four months before a Chilean quake killed 20,000.

San Francisco’s quake was smaller than the series of shocks around New Madrid, Mo., over a few winter weeks in 1811-12. They were strong enough to ring the bells in a Charleston, S.C., church that was later destroyed in that city’s 1886 quake. Scores of millions of Americans now live on the unstable faults that shook mid-America in 1811-12.—Dawn/Washington Post Service

Quake: worsening factors

PERHAPS the most heartening and positive feeling that one has experienced in the last few days is the massive and spontaneous response of ordinary Pakistanis to the earthquake that devastated the northern half of the country.

On Sunday, thousands of people visited one of the main relief centres set up by the armed forces at Karachi’s PAF museum. One saw a long line of cars of people queuing up to donate to the quake relief fund, but in addition, that many came on motorcycles, and some even on foot.

It is quite obvious that the country has not experienced anything as traumatic as what happened on the morning of October 8 and the impact that is going to be embedded on the collective mind and imagination of the nation may be as great, even greater than that following the loss of East Pakistan.

Though much of the media’s (especially TV channels’) attention was initially focused on the collapsed block of the Margalla Towers, the tragic loss of lives there pales into insignificance when compared with what happened in Mansehra and Abbotabad districts of the NWFP’s Hazara division and in much of Azad Kashmir. Despite that, the collapse of the Margalla Towers is proof — if further proof was indeed needed — of the callous way in which developers and builders play with the lives of the people.

In the coming months and years several more high-rises would be planned for the city and hopefully this time around the Capital Development Authority will not look the other way but ensure that such structures are at least able to withstand the jolts of earthquakes. This is not an unreasonable expectation given that the Northern Areas and Hazara division are prone to earthquakes, and that the Federal Capital lies on one of the main geological fault-lines of South and Central Asia.

While the main quake was indeed of a massive 7.6 magnitude (compounded as it was by the fact that it occurred relatively close to the surface), the devastation in cities like Abbotabad and Muzaffarabad and a relatively large town of Balakot has been frightful and widespread.

A visit to any of these places would make it clear that a lot of the recent construction was haphazard and ill-planned and the craze for building commercial plazas had reached these places as well. Unfortunately, as in the rest of the country, two things also came with this kind of construction. One, that the material used was not such that it would make a structure able to withstand the shock of an earthquake even of moderate intensity and two, that construction bye-laws and regulations were either non-existent or (as is more likely the case) not enforced by the local civic agencies.

In fact, it could be safely said that an independent engineering survey would reveal that most of the recently built high-rise buildings in Karachi would fall the way the Margalla Towers did. According to a person who lives in Islamabad and who had been to the very apartment block that collapsed, the building had a big crack running through it last year but nothing was done — either by residents or by the dormant CDA (Capital Development Authority) — to repair the crack. In fact, several residents of the city say that the CDA seems to focus all its energies on beautifying the city and that too the parts that VIPs like the president or the prime minister frequent.

There are many who may have thought that the areas affected are sparsely populated because of the mountainous terrain. But the facts are otherwise. In fact, taking Hazara division, Azad Kashmir and the Northern Areas (the Gilgit, Hunza and Skardu areas) as a whole, the bulk of the population of this region is concentrated within a 300-kilometre radius from Islamabad — which includes all the cities and towns worst hit by the quake.

The area is quite mountainous and in fact lies on the extreme western edge of the Himalayas but both Hazara and Azad Kashmir happen to lie in the monsoon belt (which explains why their mountains are lush green compared to the barren ones in the Gilgit area further north) and hence are quite heavily populated, with houses upon houses built on the slopes of the hills, ridges and sometimes even on steep cliffs.

The 1998 census shows a population of about 3.5 million in Hazara division alone and may well be close to five million in 2005. The latest census figures also date back to 1998 and show a population of 2.9 million with over 88 per cent living in the rural areas. Hence, though a lot of the areas affected by the quake may be very remote, they are not as sparsely populated as people tend to think and that unfortunately has shown up in the casualty figures.

The time is to give and give as much as one can, in cash and in kind, for the relief and rehabilitation of the stricken people. People at the Islamabad-based Rural Support Programmes Network which has unit and field offices in Mansehra, Abbotabad and many Azad Kashmir districts say that tents, blankets, bottled water (since water sources have shifted and springs dried up in many villages), dry food, milk (dry and liquid), medicines and surgical supplies like pyodine, cotton rolls, gauze, bandages, needles and syringes, cannulas, drips, anti-tetanus injections, antibiotics, pain killers, flagyl (injections and tablets), ORS, cough syrup, diazepam tablets and zantac (injections and tablets) are badly needed.

The television channels seem to be doing a good job of publicizing all the places where relief can be delivered and the use of mobile phones (especially SMS) has helped mobilize a lot many young people in the task of collection and dispatch of relief material.

It may take days, even weeks for all the debris and rubble to be cleared and by then the harsh winter of the north will set in, with hundreds of thousands of people rendered homeless and shivering under the sky. Building a house from scratch, with the local economy and infrastructure devastated is going to be an arduous and challenging task. But before that phase comes, many a remote area has still to be reached and people trapped in rubble and under collapsed buildings need to be rescued and given medical treatment.

Those who are able to rise from the ashes of this catastrophe will have to realize that it is in their own interest that they then build homes which are earthquake-resistant. This does not mean that such homes will never fall down in a quake but the chances of such a happening should be minimized.

The government which has said that it plans to help with the building of the homes should ensure that all structures are earthquake-resistant. While the planning and construction may be complicated and expensive, there are some basic points which can be conveyed to lay persons, and these are: the idea is not necessarily to strengthen a building but to increase its shock absorbing capacity.

When an earthquake occurs, the ground under a building begins to shake. Because it is static and begins to move in the opposite direction — much like a glass moving in the opposite direction when a piece of cloth place under it is yanked to one side. The main difference between this analogy and a real-life situation is that a building, unlike the glass, is attached to the ground. Hence, as the ground shakes, a huge force builds up and is exerted on the building. It is this that damages the building — including, as in the case of the Margalla Towers, causing it to collapse.

Various measures and technologies are available these days to make buildings earthquake-resistant and this is something that the government must take up now in all seriousness. The NWFP and AJK governments will also have to do a post-mortem on the devastation to ascertain whether the extensive collapse of buildings of schools, offices, hospitals and homes and the horrific deaths and injuries were caused largely by the works department officials and unscrupulous contractors who used substandard building materials in the construction of these.

Email: omarq@cyber.net.pk

Time to change control

WHO should run the internet? Until recently it was an academic question. After all, the United States — thanks to public money and (later on) private entrepreneurialism — had been the midwife of the net in the 1960s and had assumed de facto maternal control.

But this divine right is now being challenged. Last week the EU proposed new global institutions, possibly under UN control, to replace existing organisations such as Icann which controls the issuing of domain names such as “.com” and the “root servers” critical for the working of the net’s infrastructure. This is to be decided at next month’s UN world summit in Tunis on the information society, where the US is likely to be in a tiny minority against the rest of he world.

It would be wrong to exaggerate the influence of Icann since the internet is by its nature a highly fragmented system that is very difficult to control. But Icann, though nominally independent, is subject to a veto by the US department of commerce which set it up. The Bush administration has made it crudely clear that it will not give up its veto and especially not to a body answering to the UN.

It is time the US had a more mature approach. Whatever its origins, the internet is a global phenomenon and that must be reflected in its governance. The US has done immensely well out of its invention since it produces most of the hardware and software that powers the internet.

—The Guardian, London