THE advent of election season is witnessing rollback of new taxes — GST on export sectors, tractors and capital gain tax on the stock market — introduced over last one and half a year amidst a lot of resistance.And rollbacks were approved by Finance Minister Abdul Hafeez Shaikh (who himself criticised politicians for their ‘historic failure’ to raise tax coverage) despite the government commitment to increase tax-to-GDP ratio to 15 per cent by 2014 from a declining rate of a meagre eight per cent.
But a counter argument from President Zardari, who according to a cabinet member, has been instrumental in recent changes is that banking sector is saturated in terms of liquidity owing to ballooning government borrowing, and powerful groups, who have the capacity to redirect their money to Pakistan from abroad or trigger some economic activity, should be facilitated. He rejects the ‘narrow focus on documentation.’
The rollback started in April last year with a partial revamp of sales tax zero rating facility for five major export sectors soon after the introduction of substantial taxation measures after the failure to levy broad-based and integrated value added tax.
The tax relaxations for textile, carpets, leather, surgical and sports goods included an amnesty scheme for the unregistered units in these sectors with a stated objective to facilitate exports, reduce refunds, bring revenue gains on domestic consumption, promote documentation and transfer investments from grey areas into white economy and ease cash flows to businesses. In certain cases, the uniform sales tax rates of 16-17 per cent were reduced to zero, four or six per cent. What has been the impact on revenue loss of these measures are yet to be quantified.
This was followed by a reduction in general sales tax rate on tractors from 16 to five per cent early this month. The Economic Coordination Committee (ECC) of the Cabinet led by the finance minister had earlier rejected a proposal to reduce tax rates on tractors on the argument that sale of tractors had drastically reduced.
In a news briefing, the former Chairman of the Federal Board of Revenue Salman Siddique had said in the presence of the finance minister that tractor manufacturers had themselves accepted that tractors sales had dropped not because of GST but in anticipation that tax would either be reduced or withdrawn as assured by powerful agriculturists in the government.
Surprisingly, however, a cabinet committee set up by Prime Minister Gilani and led by Minister for Kashmir Affairs Manzoor Khan Watoo gave a commitment to the tractors industry to reduce GST from 16 to five per cent. The ECC that had earlier rejected the proposal readily approved the tax cut and constituted another committee to suggest ways to gradually increase the tax rate to 16 per cent in three years.
That follows a major tax reversal. During a visit to Karachi Stock Exchange, the finance minister accepted all proposals floated by the powerful brokers, and supported by their former broker colleagues in the Securities and Exchange Commission of Pakistan that the government has been resisting over the last 22 months.
Welcomed by major brokers who have been staying away from the stock market crowd and a market surge of over 259 points, the finance minister announced an amnesty to the brokers to redirect their fortunes earned through the market crashes of 2005 and 2008 and stashed abroad to be whitened in the stock market.
The finance minister promised that ‘no questions to be raised’ about the source of income invested in equities till 2014; afterwards, the wealth tax to be treated as white (genuine); withholding tax on sale to be abolished; capital gains tax (CGT) the issue at the heart of the matter to be frozen at 10 per cent till June 2014; and finally, the National Clearing Company of Pakistan Limited (NCCPL) to deduct CGT, so as to avoid a direct contact of investor with the Income-Tax officer and dispel the fear of harassment.
The jubilant brokers responded with another 263 point surge in the market on last Monday. These amnesties will provide an opportunity to re-route brokers’ money, and expand the market. But that this would restore investor confidence is far-fetched because it ignores the well known fact that their confidence was shattered by market crashes perpetuated by the same brokers in connivance with a friendly regulator.
The crashes in 2005 and 2008 ripped apart investor confidence and made the small investor realise that stock market may be a safer avenue for stock brokers to multiply their fortunes but for them, it is a dangerous place where they can sink their savings. This realisation alone has led to desertion of capital market.
The decision came at time the government should have received about seven quarterly tax payments along with returns as required under the capital gain tax rules. During the period, both the finance minister and the Federal Board of Revenue have been evasive in telling the honest taxpayers how much taxes had so far been collected on account of CGT.
This is another momentous victory for stock market players who had successfully engaged the policymakers and political bosses for years to evade tax despite earning trillions of rupees. The stock markets and their brokers have failed the parliament upfront and the authorities played as their part.
Nothing can be a better illustration than the subversion of laws made by the parliament and defiance of Sec 37-A introduced in Income Tax Ordinance, 2001 in the budget 2010-2011 to levy capital gains tax on capital market investments. The government had set a nominal collection target of about Rs5 billion in the first year of its introduction to build the documentation base for better returns going forward.
From the very beginning, the brokers had made up their mind to prove that CGT was not worth the paper it was written on.They deflated turnover to prove that, and diversified their businesses elsewhere to other tax-free areas.
CGT is levied in most countries. In Pakistan, brokers and other institutional investors could not digest this levy, though it was imposed after decades of exemption.
To begin with, brokers sought concessions from CGT like exemption of foreign investors, collection of CGT by brokers, etc.which could make the levy virtually ineffective. Frustrated initially, they then created hurdles in the way of enabling rules for CGT.
Finally, after the much delayed CGT rules did see light of the day, they started picking faults in these rules and manoeuvring for amendments of their choice. Not satisfied, they again deflated stock index and convinced the finance minister to yet another tax-whitening scheme until 2014, a binding on a future government too.
One of the amusing logic is to enable the unlisted companies into the barren and deserted stock market. Instead of looking at the fundamental dynamics of a capital market which lures the companies for enlisting, the brokers have been offered superficial solution of tax concessions.