Tax relief for equity

THE task force for rapid industrialization of Pakistan set up by the ministry of industries has come up with a comprehensive report on the pre-requisites for a sustained industrial expansion. The report prepared by Dr Ejaz Nabi of the World Bank, who headed a team of economic experts, covers vast areas ranging from the fiscal and monetary sector reforms to infrastructure and judicial prerequisites for a successful industrial policy and effective CBR reforms which can rid it of its chronic faults and failures.

But the public many be interested in the recommendations the task force has made in respect of tax reforms which are specific in terms of relief. But the rich and those who speculate in the real estate or fix the deals on the stock exchange may be angry with its recommendations. Even more annoyed can be the feudal lords whose excess income has been suggested to be taxed like all other incomes.

But the task force has been set up by the ministry of Industries, Production, and special initiatives and not by the ministry of finance and the latter may not welcome the radical reforms suggested by a committee set up by another ministry. However, Prime Minister Shaukat Aziz also holds the portfolio of finance and everything that happens in the government takes place under his large umbrella and he has to stand by his ministers.

The fact is that if the task force has suggested varied tax relief which may reduce the revenues of the government in a situation in which a deficit of four per cent of the GDP is likely, it has also suggested the means to increase the revenues from various large new sources. The government will be a gainer by adopting the means suggested by the task force and the long delayed measures, which should be enacted now and enforced earnestly. But taxing the rich and the “quick” money makers is a tough task in Pakistan as they are too many in number and too influential and join hands across the political divide when their basic interests and source of authority are challenged. Too many of them including the new feudals are in the assemblies and in the cabinets and include senior bureaucrats with large landholdings.

So immediately after becoming prime minister, Mir Zafarullah Jamali said there was no scope for land reforms as they had already been completed. There was no hard reaction to that statement from people as they realized the futility of protests in such circumstances.

The task force has suggested low rates of income tax. The number of tax slabs should be reduced from five to three and the exemption threshold where the income tax levy begins should be made higher. The taxation should make allowance for inflation and be adjusted accordingly or the taxation slabs too should be indexed.

The report says that in Pakistan the taxation rates are high compared to similar countries in the OECD/ ASEAN blocs. The structure of the withholding tax with different rates be applicable to different instruments and institutions in the financial sector. Industrialists in Pakistan are now concerned over the high cost of doing business in the country explicitly and implicitly due to corrupt practices. That makes industrial start-up costly and late.

The task force admits that despite the low tax-GDP ratio in Pakistan, there is multiple taxation and higher rate of corporate and personal taxation along with other complex rules and procedures, which have been enforced. The manufacturing sector pays multiple taxes which raises its effective rate of taxation, says the task force.

Industrialists in Karachi complain that they have been paying around 40 taxes to the federal, provincial and local governments. Apart from the total amount involved, the manufacturers and their managers have to spend a great deal of time to pay such taxes and other official dues and that breeds corruption. The report does not mention corruption outrightly and emphasizes it in the manner it could, but only talks of “speed money” which income tax payers pay to taxation officials. It wants to reduce the interface between the income tax payers and the taxation officials as much as possible.

The CBR came up with the universal self-assessment and claimed it as a major achievement, but the task force does not seem to rejoice over that.

The report also wants to reduce the discretionary powers of the taxation officials as much as possible. It emphasizes this point repeatedly that such face-to-face meetings between officials and tax payers breed corruption, reduce the total revenues and stand in the way of broad-basing the taxation.

The report wants to broaden the tax base by making more people pay income tax than around 1.2 million do now. That has to be done by lowering the tax rates at one end and withdrawing the exemptions at the other.

The World Bank, IMF and the Asian Development Bank have been making such demands for long, but the government has not heeded such counselling, but the international financial agencies see no other way out if Pakistan wants to make rapid progress. But the government has preferred high-end varied taxes with differing rates of exemption or total exemptions. That too creates plenty of space for corruption.

The high sales tax of 15 per cent with its exemption for exporters and refunding of the tax paid after the exports have been made has been a source of large scandals. Varied attempts to check the refund abuse has not been a success because of the tendency of taxation officials in making large refunds unethically.

The task force mentions the failure of audit to check such abuses despite various attempts and has urged more effective checks. Audit in the area of taxation as a whole is only partially effective which has too many loopholes that ought to be plugged more resolutely.

Under-invoicing of imports continues despite the large reduction of import duties to an average of 25 per cent and now the prime minister wants the imported goods to be cleared in two days. In such an event, the scope for corruption may increase unless more effective scrutiny is undertaken.

The task force has called for taxation of income from all sources as the World Bank and IMF have been doing for long to mobilize larger revenues. It wants taxation of capital gains at a time when investors on the stock exchange have been making large fortunes. The Karachi Stock Exchange-100 index is racing towards 14000-15000 creating new records. It wants taxation of the large real estate gains as well as income from rent. And it certainly wants to tax agricultural incomes, a move always resisted by the ruling and owning classes.

It acknowledges that the reform of the CBR has made progress but much more remains to be done and there is a lack of the adequate system for detecting non-filers of income tax returns. And it has a poor system of audit programmes.

Inefficacy of the audit system as it prevails in the financial and fiscal system has been repeatedly emphasized in the report. The weakness is both in the design of the system and in its enforcement and the CBR has a poor functioning system to deal with appeals. It stresses the present audit system should be replaced with a more effective and efficient one. The report says the taxation procedures have hampered investment incentives by increasing the cost and uncertainty, which causes a wide gulf between the objectives of the legislation and actual implementation of policies. Delayed policy execution and retention of discretionary powers of taxation officials have several adverse consequences for the manufacturing sector, it asserts.

Changes in law were done to create backdated dues. Penalties were levied and bank accounts frozen of the taxpayers on frivolous assessments, laments the task force.

Multiple sales tax audits have raised the cost of doing business in Pakistan and the delays in getting refunds and duty drawbacks have created liquidity problems for the taxpayers. In the area of sales tax while those exporters who paid full taxes on their inputs rightly claim the refunds after exports, others who indulge in fraudulent practices in collusion with the customs officials get their refunds “quick”. The real exporters instead wait for quite some time for the refunds. How to overcome this problem has been vexing the CBR chiefs for long.

The report calls for better documentation as one of the solutions for this persisting problem.

The policy of low or moderate taxation with multiple taxes and also of high taxation with large exemptions have failed. And the policy of relying on sales tax collection to make up for the low direct tax revenue has only been a partial success, while the low income groups are hit hard.

The policy of taxing small income groups heavily through multiple taxation while sparing the big income groups beginning with the feudal lords has resulted in low tax base and small revenue collection. And while the low-income groups are taxed through income tax and sales tax at the spending stage, the high salaried groups are given too many large perquisites, which are in fact tax-free, and they include the ministers as well.

We need a rational taxation policy in which the industries are not too heavily taxed through multiple taxation. The cost of doing business should be reduced and exports made cheaper. And there should be no sacred cows in the fiscal sector whether they be feudal lords or tribal chiefs or ministers with too many perquisites. We need a tax system which can produce adequate revenues, conforms to the demands of the equities for all. Such a system may take five years or more to evolve if a good beginning is made now, but that should be attempted earnestly and sustained.

Dr Ejaz Nabi produced his report in January 2005. The ministry is yet to ascertain the views of various stakeholders, as all the key participants have to agree to the core of the recommendations and the earlier it done the better, as the unemployment problem has to be attended to urgently.

More people than space

(Art Buchwald is recuperating from surgery. In his absence, here’s a substitute column by Andy Rooney.)

TODAY I want to tell you about a bad idea I have that I can’t get out of my mind: Let me begin by pointing out that 100 years ago, there were 85 million people in this country.

Fifty years ago, there were 168 million.

Today, there are 297 million Americans.

Is there anyone who doesn’t think there are too many of us? You know, except for themselves?

Any time we do something, there are too many of us doing the same thing.

Everywhere we go to do something, it’s crowded. Everywhere we go, there are more people than the space available.

Look at the crowds on the street at lunchtime.

Look at the number of kids in our classrooms.

If there’s a good movie, too many of us try to get in at the same time and the line is around the block.

Look at the roads coming into town in the morning. Now, look at the commuters going home at night. Do we all have to do everything at the same time?

One hundred twenty-eight million Americans commute to work every day and about 76 per cent of them do it alone in their cars at the same hour. Ridiculous.

The idea I can’t stop thinking about is this: We should rearrange the way we use our 24-hour day. Divide the day into three parts. Those same streets that are crowded during the day are empty at night. We have to forget about night and day and use the roads all 24 hours. This would be a major change in our lives. We’d have to find a way to light up everything 24 hours a day. Not having night would be hard at first but we’d get used to it.

Stores should be open 24 hours a day. So should theatres and restaurants. Buses and all public transportation should run all day and all night. We’d still all work for eight hours — but not the same eight. We might even consider dividing the workday into just two parts instead of three if that would work out better.

Workers would all be able to find parking places when they got to their jobs because two thirds of the people wouldn’t be there then.

If it turns out no one wants one of the shifts because of the time, the pay for those undesirable hours would be raised to make that shift more attractive, or the least desirable shift would be cut to seven hours instead of eight to get more people working then.

It might be a good idea if we had some way of identifying ourselves, too, so everyone knew which work group we belonged to. It could be an article of clothing we wear or some impermanent tattoo on the arm or hand. A person’s work group could become a matter of pride ... like belonging to a club. There might even be competition between the three work groups to determine which was most productive.

In this new world, we wouldn’t all be having breakfast, lunch and dinner at the same time. We wouldn’t go to bed the same hours. Television shows would be available when viewers wanted them ... not when the networks felt like showing them. “60 Minutes” might be broadcast Sunday at 6 a.m., 3 p.m. and midnight. People would get used to a reordered life.

Now, I’m not saying there aren’t some problems with this idea. For instance, I don’t think people who work in different time periods should get married. Or if they did marry, one of them should change shifts.

This new schedule might even cut down on the divorce rate in this country. If a husband and wife weren’t getting along, one of them could move into another time group. The bed would still only be made once, though.

Not everyone works, but those who were retired or otherwise unemployed would still have to choose one of the three time periods during which they would routinely do chores like shopping, housework, snow shovelling or lawn mowing.

We’ve got to do something. People are not going to stop having more children than they can take care of and there’s a finite amount of space left in America to accommodate all of them.

If you disagree with me on this idea, write me a letter but please don’t mail it. —Dawn/Tribune Media Services

America’s message to Iraq

AMERICA’S agile envoy in Baghdad, Zalmay Khalilzad, is working these days to cajole Iraqi political leaders to put aside narrow interests in favour of a government of national unity.

But behind the political dickering lies a stark message: If the Iraqis can’t agree on a broad-based government of reconciliation, the United States may have to reduce its military and economic support. America won’t bankroll one side in a civil war.

I spoke with Khalilzad by telephone this week about his efforts to coax a compromise from the Iraqis. By most accounts, the Afghan-born diplomat has been a brilliant ringmaster of the Baghdad political circus. But even he can’t soften the dilemma facing the Iraqis: They must find a way to work together or the fragile Iraqi state will unravel.

The American envoy is deploying a weapon the United States hasn’t used much in Iraq — the word “no.” He said he is arguing that the new government must give the two security ministries — interior and defence — to people who have broad national support and aren’t linked to sectarian militias. Otherwise, America may have to adjust its massive effort to train and equip the Iraqi security forces.

“The security ministries have to be run by people who are not associated with militias and who are not regarded as sectarian,” Khalilzad told me. “The issue is how forces that we’re investing a huge amount of money in are perceived by the Iraqis. If they are perceived as sectarian, their effectiveness will not be there. We have insisted on this, stated it clearly. These two ministries need people who are acceptable to all parties of a national unity government. . . . We are saying: If you choose the wrong candidates, that will affect US aid.”

Khalilzad’s message is aimed largely at Abdul Aziz Hakim, the leader of the Shia religious coalition that won the largest number of votes in December’s election. The current interior minister is a close ally of Hakim’s and a former leader of the Shia militia known as the Badr Brigade. US officials believe that under his control, the interior ministry has condoned torture of Sunni prisoners and increasingly used the police to settle sectarian scores. That must stop, the Americans argue.

US officials see Iraq at a decisive turning point following December’s election to choose a permanent government. They had hoped the balloting would open the way for a secular coalition that might bridge the bitter divisions among Shias, Sunnis and Kurds. Instead, the balloting reinforced those sectarian tendencies. Iraqis voted their fears and the us-or-them logic of sectarian conflict. Religious and ethnic parties that maintain strong militias did well; secular parties that support national institutions did poorly.

“We’ve reached a point of no return now,” argues Raad Alkadiri, an Anglo-Iraqi who advised the British government in Baghdad during the first year of occupation and who is now a consultant with PFC Energy in Washington. “Are Iraqis willing to put aside their narrow interests? Is there a real Iraqi state? You can’t fudge this. This is the edge of the precipice.”

Khalilzad is telling Shia and Kurdish leaders that they have a golden opportunity to stabilize the country because of a sharp split that is emerging within the Sunni insurgency. Sunni tribal and political leaders who had been backing the insurgency are increasingly angry at the terrorist tactics of Al Qaeda’s leader in Iraq, Abu Musab Zarqawi. That opens the way for a deal — if the Shias and Kurds want one. “The tectonics are shifting in the Sunni heartland,” Khalilzad told me. “A fault line is developing that is going to expand, between Zarqawi and his allies and elements of the insurgency.”

If the Iraqis can reach across the sectarian chasm, it could mark the beginning of a virtuous cycle in Iraq that could finally bring a measure of stability and prosperity. Khalilzad has been talking with Iraqi leaders about a “First 100 Days” programme that would get the new government off to a fast start. —Dawn/Washington Post Service

Choice before Bush

A LEADER is often confronted with a situation where “he is doomed if he does it and doomed if he does not.” That is the dilemma President George W. Bush is facing in Iraq.

More and more Americans are turning against the idea of keeping US forces in Iraq and all opinion polls taken in the last six months have consistently shown that a good majority of Americans want the US to leave Iraq as soon as possible.

However, there are those who think that the withdrawal of US troops would allow the terrorists to take over Iraq as the base for global terror. President Bush seems to share their assessment and remains adamant that he will keep them there until the mission is accomplished. He refuses to set a date for their withdrawal. Opposed to this view, most Arab and non-Arab observers believe that US forces have become a part of the problem rather than the solution. Consequently, the sooner they are pulled out of Iraq, the sooner Iraqis will be able to sort out the mess created by Americans’ continuing occupation of their country.

Thus, President Bush finds himself on the horns of a dilemma. If he orders the withdrawal of US forces and the situation in Iraq deteriorates into a full-scale civil war, he will be blamed for taking his country US to an unwinnable war and causing it to suffer a bigger defeat than it had in Vietnam. He fears that the situation is Iraq may become worse than what it was in Somalia as fighting will not remain confined between warlords but will degenerate into an ethnic and sectarian bloodbath which can spread throughout the region, thus undermining the security of Israel which was originally intended to be one of the main beneficiaries of the attack on Iraq.

While this debate to stay or leave goes on, the casualty figure among US forces is mounting every day. So far the US has used every weapon in its arsenal, except the nukes, and lost 2300 soldiers but the insurgents remain undefeated. This is causing great concern to the Bush administration, which had thought that the invasion of Iraq would be like a picnic. The loss of US soldiers which has far exceeded the total casualties of the first and the second Gulf wars is swelling the ranks of anti-war protesters and threatening to turn the coming congressional elections into a political burial ground for the Republican Party’s candidates and perhaps the White House in 2008.

The death of more than 2,300 US soldiers and the physical and mental injuries caused to tens of thousands more could not be remotely imagined by President Bush and Defence Secretary Donald Rumsfeld who appeared upbeat in the press briefings following the invasion and the overthrow of Saddam Hussain.

Even more worrying than the deaths the soldiers is the demoralization of the US forces in Iraq who appear to have lost the motivation and will to fight because of the revelation that the invasion was based on deliberate lies. They strongly suspect that President Bush and his key aides knew that Saddam Hussein did not possess WMDs nor had any links with the Al Qaeda. Yet they used these as pretexts for attacking Iraq without adequate preparation which has cost them dearly.

Consequently, they are not convinced of the virtues and merits of the new reason, the “democratization of Iraq”, for which they are being asked to give the ultimate sacrifice. The “present and clear” danger to the US, its Nato allies and, most of all, to Israel by Saddam’s WMDs never existed in the first place. Bush and Tony Blair just made them up and could not even produce a cooked up WMD, probably out of fear of being found out by the embedded journalists, who were taken into the battlefields to watch the glorious victory of “good” over evil.

The change of justification from WMDs to the “democratization” of Iraq sustained the Americans’ faith in President Bush for another two years but now they no longer believe him. It is quite clear to a majority of Americans that President Bush has bitten more than he can chew, and while he is showing resolution from the comforts of the White House, their sons and daughters, husbands and wives, fathers and brothers are being killed in a far off land, which was never a threat to the US or even Israel.

In spite of the recent relatively peaceful, elections held in Iraq, it is quite apparent that democracy cannot be established in Iraq without the end of violence and that violence will not end unless the terrorists are defeated, but the terrorists cannot be defeated so long as the US forces are in Iraq. Thus President Bush is caught in a Catch-22 situation and does not know how to get out of it. He is trying his best to convince his countrymen that ridding Iraq of the tyrant Saddam Hussein was worth the loss of lives of 2,300 US soldiers. But it is not cutting much ice with them because they care little about democracy in Iraq.

An even bigger tragedy for the Americans is the death of their faith in their president and government, the grievous injury to their civil liberties, the brutalization of American soldiers and society as a seen in the atrocities perpetrated on the Iraqis in Abu-Ghraib prison and the falsification of US pretensions of being the biggest champion of human rights in the comity of nations.

It is typical of leaders like President Bush that having made a horrendous mistake they are so blinded by arrogance so as not to be able to see the only way out of the labyrinth. In his case, the way out is to restore the prestige and role of the UN by asking it to take over in Iraq and offering to pay for it. The UN can easily raise a strong force from Islamic countries willing to replace the Americans, which will make it possible for the US troops to withdraw in safety and with dignity. This option will also be far cheaper than the 100 billion dollars the US is now spending in Iraq every year.

Soldiers from Islamic countries will be neutral, have no ulterior motives, like oil or perpetuation of Israeli hegemony in the region, will not antagonize the Iraqis by launching indiscriminate aerial bombings that kill thousands of innocent Iraqi men, women and children, will not commit barbarities like the ones seen at Abu-Ghraib and will win the trust of the Iraqi population which will see them as friends rather than as invaders and cooperate with them in defeating the terrorists. The withdrawal of US troops will snatch from the jaws of the terrorists the false justification — the presence US forces in Iraq — for the atrocities they are committing against all, and stop “jihadis” all over the world from joining their ranks.

But President Bush will not take this option because he is blinded by hubris. This is tragic as in wanting to be resolute he is causing immense loss of life and resources, destabilizing the region and destroying the UN, the only institution that still remains capable of maintaining international peace and security through the moral authority it derives from being a neutral body.

Hence, for President Bush the choice is between trying to save face and sending tens of thousands more to their death or losing a bit of face and saving thousands of lives, helping stabilize the region and restoring UN’s role in maintaining international peace and security.

The writer is a former ambassador