Friday, November 30, 2007

Simply not enough

The FBR has set an ambitious revenue target for fiscal year 2007-08, but it can generate even more than that provided there are supportive policies


By Huzaima Bukhari and Dr Ikramul Haq


According to the general perception, the revenue target fixed for fiscal year 2007-08 at Rs 1.025 trillion is ambitious. In reality, it is still on the lower side -- the potential of total tax collection in the country is not less than Rs 2.5 trillion. It is sheer lack of political will and incompetence on the part of Federal Board of Revenue (FBR) -- which used to be Central Board of Revenue (CBR) till a few weeks ago -- that we have failed to collect the revenues where these are actually due. For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes, and granting unprecedented concessions and exemptions to the rich. For tapping our actual potential, there is an urgent need to tax the rich, bring undocumented economy in the tax net and distribute the incidence of various taxes judiciously amongst all segments of the society.

The Government of Pakistan, anticipating higher growth in economy, fixed the revenue target for fiscal year 2007-08 at Rs 1.025 trillion -- an increase of 21 per cent over the collection of Rs 841.4 billion in fiscal year 2006-07. The government projected that the share of direct taxes in the total tax collection for fiscal year 2007-08 will be Rs 408 billion, or 23.6 per cent higher than the previous fiscal year. This target is simply irreconcilable with an earlier statement by the FBR chairperson, in which he had claimed that there was 45 per cent growth in direct taxes during fiscal year 2006-07.

In fact, the real potential of tax collection in the previous fiscal year was not less than Rs 1.5 trillion. However, the FBR failed to achieve even 60 per cent of this, as generous exemptions and concessions were granted to the wealthy segments of society. The cost of exemption under just one head -- capital gains on stock markets -- in fiscal year 2006-07 was Rs 112.45 billion, according to government's own admission on page 262 of Economic Survey 2006-07. Had this exemption not been granted, the total tax collection for fiscal year 2006-07 would have been Rs 953.85 billion. This exemption continues in this fiscal year too and will have a negative revenue impact of about Rs 250 billion.

The people of this country are accused of not paying income tax. The reality, however, is that even a small shopkeeper in a village (whose total income is much below the taxable limit of Rs 150,000) is paying as high a tax as Rs 720 per annum with electricity bill (as a commercial user). On the other hand, a rich absentee landlord of the same area having agricultural income of million of rupees is not paying even a single penny as income tax. Similarly, a person making millions in speculative transactions (shares and property) is enjoying tax exemption, while a widow pays Rs 6,000 per annum as tax on her meager income of Rs 60,000 from bank savings.

The levy of taxes on speculative transactions and withdrawal of exemptions can easily increase the country's annual tax collection to Rs 2.5-3 trillion. However, this requires a strong political will, which is completely lacking at present because those in power are safeguarding the interests of the rich only.

The unwillingness to tax the rich reflects the pathetic state of affairs vis-a-vis tax-to-gross domestic product (GDP) ratio from 1990-2000 to 2006-07, which is highlighted in the table. For example, the tax-to-GDP ratio of direct taxes is appallingly low. Moreover, it may be noted that in these official figures a huge amount of indirect taxes is shown as direct taxes. The actual direct taxes-to-GDP ratio for fiscal year 2006-07 -- after excluding presumptive taxes ñ was around 2.4 per cent, whereas officially it was projected as 3.02 per cent.

Presently, the 'high' tax collection by the FBR is based mainly on imports and exports, as well as extraordinary profits by banks (who claim that they have profit-sharing accounts yet deny due share to deposit holders!). Importers, contractors, retailers and even service providers are passing on their tax burden to consumers and clients, courtesy presumptive tax regime introduced in 1991-92 that has also widened manifold since then. This erratic taxation is at the expense of equity and the poor are the real victims of this fiscal highhandedness.

It is an established fact that despite resorting to all kinds of highhandedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-to-GDP ratio. The burden of a number of presumptive taxes levied under the Income Tax Ordinance, 1979, has been shifted from income-earners to consumers and clients. These presumptive taxes have not only distorted the whole tax system, destroyed economic growth, and made consumers and clients the ultimate sufferers, but have also failed to bridge the widening fiscal deficit. Of the total tax collection of Rs 841.4 billion by the FBR in fiscal year 2006-07, regressive taxes amounted to Rs 631 billion (after making adjustments for indirect taxes collected under the name of income tax). The revenue deficit, despite this record tax collection, was as high as Rs 200.5 billion, while the fiscal deficit touched the alarming figure of Rs 373.5 billion.

The rich who do not pay taxes are the real culprits. Exemptions and concessions provided in our existing tax laws -- the whole of Second Schedule in the Income Tax Ordinance, 1979; most of the items of Sixth Schedule of Sales Tax Act, 1990; and innumerable statutory regulatory orders (SROs) relating to customs and excise -- should be immediately done away with. There should be a level playing field for everyone. If the government removes all exemptions and concessions, brings big absentee landlords into the tax net, manages to get taxes from the influential, and succeeds in imposing general sales tax (GST) across the board (preferably at a low rate of three per cent at one single point), there will be a record annual tax collection of Rs 2.5-3 trillion. However, this goal can be achieved only if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery.

Pakistan can easily generate at least Rs 2.5 trillion as tax revenue in fiscal year 2007-08 provided that tax-base is shifted from presumptive to real income; agricultural income tax on actual profit basis (presently it is an eye wash levied on acreage basis) is collected from absentee landlords; Section 111(4) of the Income Tax Ordinance, 2001, giving amnesty to tax evaders, is withdrawn; rate of sales tax is reduced to three per cent and it is levied across the board; provinces restore tax on gaining immovable property; and profits generated through speculative transactions in shares at stock exchanges are taxed and exemption given under the garb of capital gain are withdrawn. If genuine political will is shown, there is no reason why we cannot achieve double the target fixed for fiscal year 2007-08.

(The authors are tax advisors and teach at Lahore University of Management Sciences.)

The Emerald Isle remembered

by Kaleem Omar



Not for nothing is Ireland known as the Emerald Isle. It is one of the greenest places on earth, with lush green rolling meadows that seem at times, when the light is right, to glow like emeralds. Convivial company, of course, is an essential part of the Irish experience. As an Irish Tourist Board poster once put it, "Come to Dublin and do a slow crawl, make that a very slow crawl, through some of the friendliest watering holes in the world."

Since the early 1990s Ireland's economy has been booming, with billions of dollars a year in foreign investment and EU support funds pouring into the country. But there was a time when the Emerald Isle was known more for its leprechauns, legends and literature than for its tiger economy.

It is of that Ireland of myths and stories of which I speak, the Ireland of Molly Malone and her wheelbarrow, of Wolfe Tone and Charles Stewart Parnell, of Yeats and Maud Gonne, of rebellion and insurrection against the British, the mist-shrouded land where, during World War II, people used to say, "How can there be a world war on when Ireland's not in it?"

That's the Ireland that my late friend Sardar Yunis Khan and I often talked about when we used to foregather at his house in Karachi. A gentleman farmer from Rahim Yar Khan, and the son of a leading politician and landowner of the area, Yunis read geology at Trinity College, Dublin, in the early 1960s. After taking his degree, he went into business in Karachi, eventually becoming the Pakistan representative for a Canadian company prospecting for oil in Sindh.

Yunis travelled the world in connection with his business interests, but it was to the metaphoric Ireland of his youth that he kept returning. That's where he had spent several halcyon years as a university student and that, I suspect, was where his heart lay.

And it was that Ireland of yore -- the Ireland of Yeats' poetry -- that was usually the theme of our conversations, with the talk often going on late into the night. "Romantic Ireland's dead and gone. / It's with O'Leary in the grave," wrote Yeats, in one of his poems. When I once quoted these lines to Yunis, he remarked, "You know, KO, Yeats was right." His friends all called Yunis Khan YK, and he always called me KO.

It is now nearly ten years since YK died, but I recall our conversations as if they were yesterday. He was a wonderful friend, a generous host, and a man of wit and style. Like the Irish, he loved telling stories, regaling us with accounts of his Dublin days. And if there was an element of blarney in some of those tales, well, why not? After all, he was more than a little 'Irish' himself. Above all, though, he was a gentleman.

YK's wife, Lubna, the daughter of the well-known painter Mariam Saadullah, is the author of two plays, which were performed at the PACC in Karachi -- one in the early 1980s and the other in the early 1990s. Both were comedies much appreciated by audiences.

Although my own student days were spent in England, I know Ireland quite well from my reading and from visits to the place. Like my late friend Yunis, I, too, am a fan of all things Irish, especially their whimsical sense of humour and their literature -- a canon that includes some of the twentieth century's greatest poetry, fiction and drama.

William Butler Yeats, the century's greatest poet in English, was Irish. So was James Joyce, the century's greatest novelist, and George Bernard Shaw, the century's greatest dramatist, as well as many other leading literary figures.

Yeats (1865-1939) was born in Dublin, the son of a distinguished artist. He was educated in London, and then, when his family returned to Ireland, studied art for a three-year period beginning in 1864.

His first volume of verse, The Wanderings of Oisin, was published in 1889, and was followed by a series of prose works, published between 1889 and 1891. The Countess of Cathleen, a verse drama, appeared with other poems in 1892, and The Celtic Twilight, a collection of sketches and essays, in 1893.

Yeats was now established in the vanguard of the new Celtic movement and his position was confirmed in 1895 with his collected Poems. In 1899 he became interested in the establishment of an Irish theatre and his association with Lady Gregory led some years later to the founding of the Abbey Theatre in Dublin, where much of his dramatic work was produced.

In 1917, having previously proposed in vain to the Irish nationalist Maud Gonne, he married Hyde-Lees, and his new wife had a profound effect on his work. In 1922 Yeats became a member of the Irish Senate, in which he sat from 1922, when it was formed, until 1928. In 1923 he was awarded the Nobel Prize for Literature.

Maud Gonne, one of the great beauties of her day and a fiery speaker at anti-British rallies, was the love of Yeats' life. But his love remained unrequited and Maud Gonne ended up marrying someone else. Yeats' disappointment inspired some of his best poems. To students of Yeats' life and work, like me, Maud Gonne is a legendary figure of near mythic proportions.

Imagine my surprise, then, nay, indeed, my utter and total astonishment, when YK's and Lubna's daughter, Tahia, who, like her father before her, was at Trinity College, Dublin, casually told the assembled company one day at a dinner party at their house in Karachi in the early 1990s that her college roommate in Dublin was Maud Gonne's granddaughter and that she was thinking of inviting her over to Pakistan during the winter holidays.

Well, you could have bowled me over with a feather. I mean, to me, it was like somebody saying that her roommate at college was Robin Hood's granddaughter. Talk about shock and awe.

Changing the taxation system

By Zaheera Ahmed



There is an urgent need to revamp and reorganise our more than hundred and eighty year old taxation laws. Our revenue generation system (taxation and tax collecting machinery and methods) have become most cumbersome and beyond the comprehension of even educated citizens, not to mention the ordinary small businessmen and working class. We must open a debate particularly among the young students of economics, finance and commerce in order to gain fresh ideas as to how best we can formulate and finalise implementation of a locally-devised taxation system. Here are some ideas to ponder and debate.

Our taxation system should reflect the federal structure of the state of Pakistan. It should be clearly and unambiguously divided according to the three tiers of the state; that is federal, provincial, and the local government system, so that at no level of governance should there arise any bickering and disharmony among the governing bodies about the funds collection and distribution.

Federal taxes: An income tax of Rs10,000 should be levied on every citizen earning Rs200,000 annually, or 10 per cent of the total income if earning more than Rs200,000. The federal government should also receive a tax of five per cent on every item exported/imported in and out of the country. The third, five per cent tax should be levied on all travels out of the country. Besides this, a five per cent tax on travel by rail should also be levied, since it is a federal subject. The lower rates of taxes without exemption not even on official travel will induce a sense of confidence and equality among the tax paying section of society. The continuity of the tax structure must be ensured to enable the taxpayers and entrepreneurs plan for the future with confidence for long-term schemes.

Provincial taxes: All large size production units should pay a tax of five per cent of the total value of production to the provincial governments of the area of their location. All the large trading units situated within the boundaries of their respective provinces should pay a five per cent tax to the provincial government for conducting inter-province business. This tax should only be levied on out going cargo to other provinces in order to avoid double taxation. The third provincial tax should be on all transports (except railways) plying on inter-provincial routes, this should also not be more than 5 per cent according to the seating capacity of the vehicles, plus another two per cent if the vehicle is air-conditioned.

Local government taxes: The local governments should collect taxes not more than five per cent from small manufacturing units operating within the district's limits. The second tax of the local governments of the district should receive a tax of not more than five per cent on all transport plying on the roads and streets within district limits. This will distribute the motor vehicle tax (NVT) the provincial and local governments automatically without any hassle and bickering over the MVT collection and distribution. The third tax the local government should collect is property tax on the basis of the covered area; this should include residential houses and shops. Every shop and house must be taxed according to the universal percentage of 5 per cent per square ft. There must not be any differentiation of domestic or commercial property, except on high class or lower class areas, which can be judged according to the rental value of property in different locations of towns and cities

The rules governing taxation must be based on universal percentage without any exception and exemptions. All the governments, local, provincial and federal should strictly adhere to the rule of universality and equality. This means that, all the local governments of the country and all the federating units or provinces should apply the same percentage, rates and categories. The minimum rates and equal percentage will ensure a corruption free system of taxation without any loopholes. Thus more and more people will be encouraged to pay their taxes.

The methodology of payment: this must be made direct and simple, as mentioned above, of the total number of taxes will come down to only nine, instead of 30 or 40. The taxpayers should be able to go to the nearest bank branch of his area of business or place of residence, should pick up the relevant form available at the counter, all round the year. Fill in the name address residential/work place, nature of his/her earning and amount of his/her total income, value of production or property and make the payment and receive a receipt with three copies. One he/she should retain for his/her own record, the other should be sent to the regional income tax/other offices and the third to the CBR offices in Islamabad. In return the taxpayers should promptly receive an NTN/PTN/DTN national, provincial and district taxes bearing cards to show the staff of the respective revenue department. On payment of vehicular taxes the payers should be issued a ticket or sticker to paste on the front and back of every vehicle, every year with a different colour, so that the traffic police can check whether tax has been paid for the current fiscal year. The revenue collecting agencies and the CBR should hire staff with relevant qualifications for accounting and checking the record of payments from the banks of their respective areas may that be federal, provincial or local government taxes.

The changes in the system will certainly be resisted, but let us start an open debate on creating a new system, which will be permanent, universal, and fair for all Pakistanis. The present leadership should show the mettle to bring the change, which will free the impoverished masses of the country from the burden of unjust taxation, and the effluent section of society will shoulder their responsibilities of revenue generation with a sense of being treated in a just and fair manner.