KHALID ABBAS SAIF
FAISALABAD (March 11 2010): Economists have suggested that fiscal incentives should be provided to the returning Pakistani migrants who wish to set up small and/or medium-scale businesses.
In a study titled 'Remittances and Household Welfare', prepared by Vaqar Ahmed, Deputy Chief of Macroeconomics Section of Planning Commission of Pakistan; Guntur Sugiyarto, Economist, Development Indicators and Policy Research Division, Economics and Research Department, Asian Development Bank, and Shikha Jha, Senior Economist, Macroeconomics and Finance Research Division, Economics and Research Department, ADB, observed that these incentives may take the form of tax breaks, or other related initial concessions.
Second, to ensure future remittances cash flows, a special exchange rate may be offered on remittances arriving in special savings accounts in domestic financial institutions.
Third, the banking sector should be more proactive to increase the speed and certainty of remittance transactions to encourage more migrants to send their money through official banking channels, they added.
The economists said that this step would help in the development of the financial sector in the economy and contribute to the stability of macroeconomic fundamentals, in particular the balance of payments. It is also a challenge for the government to make remittances more redistributive by making the tax system more progressive to help low income households. It is important to note, however, that the tax structure, related to remittances, should provide incentives for migrants to send more through the formal channels. This may require amendments to the current Income Tax Ordinance, they added.
They pointed out that the challenge for Pakistan is to channel the remittance flows toward long-term investments that can contribute toward sustained growth in the real sector, while at the same time leveraging the economy away from consumption-led growth. In this regard, several key measures that have been seen across the developing world have also been considered for Pakistan. It is also a challenge for the government to make remittances more redistributive by making the tax system more progressive to help low-income households. It is important to note however that the tax structure related to remittances should provide incentives for migrants to send more through the formal channels. This may require amendments to the current Income Tax Ordinance.
In "Key Findings and Policy Implications", Economists revealed that with around two million Pakistani migrants in the Gulf region and almost the same number spread in North America, UK, and other countries, remittances from abroad have contributed significantly to the economy. The current contribution of foreign remittances is more than 4percent of GDP, and in some periods, they have become the major source of foreign exchange reserves. This paper examines the impact of remittances on the macro economy and household welfare in Pakistan using a CGE model and micro-econometric analysis. They said that the first approach is to highlight the macroeconomic and distributional effects of a reduction in remittances, while the second method is to show how remittances decrease the probability of being poor and affect the household consumption expenditure and hence poverty.
They pointed out the key findings are as follows:
(i) Descriptive analysis from survey data indicates that the mean income of a migrant household is 17.3 higher than a non-migrant household. The share of remittances in the total income increases as the household moves to a higher income group. Remittances also contribute more to rural household incomes than to urban household incomes. The share of remittances in rural households increased from 3 percent to 5 percent during 2002-06, while in urban areas it remained stable at around 4 percent. Regional characteristics also affect significantly the pattern of migration and therefore the flows of remittances in Pakistan.
(ii) The CGE simulation analysis shos that a 50 percent reduction in remittances adversely impacts real GDP growth by -0.74, real investment by -7.7percent, and total household consumption by -2.8 percent. As a result, poverty headc ount increases by 6.35 percent.
The reductions in consumption levels of rural non-farm and landless agricultural households shows the largest cut because of the remittance drop.
The poverty impact is much stronger in rural than urban areas, showing the stronger link between migration/remittance and poverty in rural compared to urban areas. This further highlights that many migrants from Pakistan are still low-skilled workers coming from agricultural backgrounds.
(iii) Results show that the probability of becoming poor declines by 12.7 percent if the household receives remittances from abroad. An increase in the household size and number of persons with secondary education lead to an increase in the probability of household member migrating. On the other hand, increasing the number of males over 15 years of age, living in urban areas, and having more household members with university education lead to a decrease in the probability of the household member going abroad.
(iv) The shares of household expenditures on food, education, clothing, and recreation increase with the availability of remittances. The predicted mean expenditure of migrant households is 41 percent higher than nonmigrant households. The highest increase is in the expenditure share on durables, ie, 74 percent. The budget share for education increases only by 2.9 percent for migrant households.
(v) The poverty headcount ratio and Gini coefficient decline by 7.8 percent and 4.8 percent, respectively, for households receiving remittances. Due to the global financial crisis, developing countries such as Pakistan, have witnessed a brief reverse migration following the laying off of workers abroad due to business closures and a general lack of demand. Pakistani overseas workers have returned home with their accumulated savings that increased remittance flows.
Furthermore, according to the Study, statistics shows the poverty estimates for both migrant and non-migrant households. The results suggest that poverty declines by 7.8 percent if the households receive remittances from abroad. This substantial reduction in poverty level signifies the importance of remittances received by households in Pakistan.
Similarly, the poverty gap and poverty severity also decline even by higher rates, ie, 11.5 percent and 14.9 percent, respectively. This implies that some of the remittance recipients are actually the poor households so that remittances reduce the poverty gap and poverty severity. Moreover, the income distribution of migrant households is actually better than non-migrant households. The Gini coefficient of migrant household is 4.8 percent lower than non-migrant households, study report said.
Copyright Business Recorder, 2010
Monday, March 15, 2010
Monday, February 22, 2010
Collection of taxes: Parliamentarians, experts support provincial autonomy
RECORDER REPORT
ISLAMABAD (February 19 2010): Parliamentarians and tax experts strongly supported provincial autonomy for collection of taxes to broaden the tax-base and raising tax-to-GDP ratio in the country. During a seminar on pre-budget public consultation by NA committee on Finance and Revenue on Change in Collective National Behaviour.
"How to expand the Tax base in Pakistan: Ideas for the budget 2010-2011", most of the parliamentarians agreed that tax culture is necessary for expanding the tax-base. Experts pointed out that rich people in rural area are paying 14 percent less income tax as compared to those in urban areas. To remove this distortion, there is a need to impose tax on agricultural income to make income tax enforcement equitable in the country.
Most of the participants including the members of the Parliament suggested to bring agriculture, real estate and stock exchanges into the tax net. Other recommendations of the seminar included setting up of tax intelligence unit in FBR, data warehouse and the introduction of the subject on tax in the school classes for developing awareness about paying taxes among the masses.
While strongly supporting agriculture income tax, Senator Haji Adeel said that the depressed salaried class in urban areas is paying tax, than why the income from agriculture is not being taxed by the government. Senator Ilyas Bilour opined that agriculture tax would be considered as a potential area for increase in tax base. The provincial autonomy would have a good impact on tax to GDP ratio and broadening the tax base.
Former FBR Member Dr Ather Masood Ahmed shared vital data about taxes that only five major commodities contribute 50 percent of the taxes. If taxes are abolished on the POL, major chunk of revenue would not be collected. The compliance level needs to be improved before expanding the tax base.
Former FBR Chairman Abdulla Yusuf presented viable proposals for raising Tax-to-GDP ratio to implement the Turkish taxation system in Pakistan. The Turkey has managed to double the Tax-to-GDP ratio in a short span of time. Under the Turkish Tax Model, the tax department draft return on the behalf of the taxpayers and the same was sent to the registered units to amend the returns, if require.
Turkish tax department has all necessary data of the taxpayers and they have the capability to draft the return. However, taxpayer has given the opportunity to revise the return on the basis of data maintained by the unit. He said that tax gap of around 700 billion exists, which needs to be tapped. He referred to the example of Chilli where tax-to-GDP ratio jumped from 15-30 percent to 100 percent due to automation and tax administration reforms.
He opined that the State Bank of Pakistan (SBP) profits is not subjected to tax, which is a distortion in the tax system. The government should amend the Banking Companies Ordinance, 1962 and Protection of Economic Reforms Act, 1992 to access accountholder's information by the tax department. It is necessary to end such kind of secrecy under the banking laws to check the business transactions for brining potential taxpayers into the tax net.
There is a need to abolish the clause of bank secrecy law that is prohibiting access of tax authorities from bank accounts of taxpayers. Country like Switzerland has authorised its authorities access to the information of bank accounts of taxpayers and why not in Pakistan.
Responding to a query, he said that the President, Prime Minister and other policy makers have never intervened into the working of the FBR. He strongly dispelled impression that influence has been used in the transfers and postings of the tax officials. He suggested that the Data Warehouse is the most important tool for broadening the tax-base. The third party data from all potential sources has been matched with the information declared by the registered unit under the Data Warehouse concept.
Abdullah Yusuf further said that the tax department should be in a position to offer the taxpayers a tax return prepared by its officers based on income and expenditures of taxpayers on the basis of third party information.
Muhammad Sabir, Principle Economist, Social Policy and Development (SPDC) Karachi proposed increase in capital value tax on investment in long term assets like property and real estate. This investment should go in job creating areas like industrialisation and other productive sectors.
He suggested that FBR should setup a Tax Intelligence Unit to check the income and expenditures of the elite class for recovery of due tax from buyers and sellers of property, owners of luxurious cars and those involved in transaction different businesses from different bank accounts.
People are regularly arranging lavished parties and expenditures should be proposed in such cases. Riaz Fatiayana MNA proposed tax on spiritual practitioners (Peers and Faqeers), who are making money in major cities and their income should be taxed.
Shahid Khakan Abbasi, MNA proposed to abolish income tax as this levy is only targeting salaried class and few industrialists and majority of the rich are not under its ambit. Mian Abdul Sattar, PPP MNA suggested the FBR to auction the tax collection targets at the level of Union Council to bring in the tax net those people who are not paying the tax.
Chairperson Fauzia Wahab said that out of 170 million population only 1.7 million are taxpayers. She said that the Federal Cabinet's decision of February 10 to present Budget proposals to Parliamentary Committees by May 2010 to allow in-depth budget review and input by Parliamentary Committees was a triumph of efforts of all Parliamentarians over the years to reform the Parliamentary Budget Process.
Some of the members of National Assembly Standing Committee on Finance opposed tax exemptions given to army personnel. They claimed that land within the jurisdiction of the cantonment areas belongs to the federal government.
It was granted to the armed forces for construction of defence related buildings and establishments like barracks, but cantonment boards have been converted into commercial property. Tax should be applicable on the residential and commercial properties in the cantonment boards. Senator Haji Mohammad Adeel pointed out that land of the cantonment areas belong to the federal government and the army personnel should pay taxes on the same.
The armed forces should play their role in increasing the Tax-to-GDP ratio. In this regard, the Land Procurement Board Act in the cantonment areas needs to be revised. MNA Kashmala Tariq of PML-Q was of the view army personnel having more than one house should be liable to taxation. In this way, armed forces could help in increasing Tax-to-GDP ratio.
Copyright Business Recorder, 2010
ISLAMABAD (February 19 2010): Parliamentarians and tax experts strongly supported provincial autonomy for collection of taxes to broaden the tax-base and raising tax-to-GDP ratio in the country. During a seminar on pre-budget public consultation by NA committee on Finance and Revenue on Change in Collective National Behaviour.
"How to expand the Tax base in Pakistan: Ideas for the budget 2010-2011", most of the parliamentarians agreed that tax culture is necessary for expanding the tax-base. Experts pointed out that rich people in rural area are paying 14 percent less income tax as compared to those in urban areas. To remove this distortion, there is a need to impose tax on agricultural income to make income tax enforcement equitable in the country.
Most of the participants including the members of the Parliament suggested to bring agriculture, real estate and stock exchanges into the tax net. Other recommendations of the seminar included setting up of tax intelligence unit in FBR, data warehouse and the introduction of the subject on tax in the school classes for developing awareness about paying taxes among the masses.
While strongly supporting agriculture income tax, Senator Haji Adeel said that the depressed salaried class in urban areas is paying tax, than why the income from agriculture is not being taxed by the government. Senator Ilyas Bilour opined that agriculture tax would be considered as a potential area for increase in tax base. The provincial autonomy would have a good impact on tax to GDP ratio and broadening the tax base.
Former FBR Member Dr Ather Masood Ahmed shared vital data about taxes that only five major commodities contribute 50 percent of the taxes. If taxes are abolished on the POL, major chunk of revenue would not be collected. The compliance level needs to be improved before expanding the tax base.
Former FBR Chairman Abdulla Yusuf presented viable proposals for raising Tax-to-GDP ratio to implement the Turkish taxation system in Pakistan. The Turkey has managed to double the Tax-to-GDP ratio in a short span of time. Under the Turkish Tax Model, the tax department draft return on the behalf of the taxpayers and the same was sent to the registered units to amend the returns, if require.
Turkish tax department has all necessary data of the taxpayers and they have the capability to draft the return. However, taxpayer has given the opportunity to revise the return on the basis of data maintained by the unit. He said that tax gap of around 700 billion exists, which needs to be tapped. He referred to the example of Chilli where tax-to-GDP ratio jumped from 15-30 percent to 100 percent due to automation and tax administration reforms.
He opined that the State Bank of Pakistan (SBP) profits is not subjected to tax, which is a distortion in the tax system. The government should amend the Banking Companies Ordinance, 1962 and Protection of Economic Reforms Act, 1992 to access accountholder's information by the tax department. It is necessary to end such kind of secrecy under the banking laws to check the business transactions for brining potential taxpayers into the tax net.
There is a need to abolish the clause of bank secrecy law that is prohibiting access of tax authorities from bank accounts of taxpayers. Country like Switzerland has authorised its authorities access to the information of bank accounts of taxpayers and why not in Pakistan.
Responding to a query, he said that the President, Prime Minister and other policy makers have never intervened into the working of the FBR. He strongly dispelled impression that influence has been used in the transfers and postings of the tax officials. He suggested that the Data Warehouse is the most important tool for broadening the tax-base. The third party data from all potential sources has been matched with the information declared by the registered unit under the Data Warehouse concept.
Abdullah Yusuf further said that the tax department should be in a position to offer the taxpayers a tax return prepared by its officers based on income and expenditures of taxpayers on the basis of third party information.
Muhammad Sabir, Principle Economist, Social Policy and Development (SPDC) Karachi proposed increase in capital value tax on investment in long term assets like property and real estate. This investment should go in job creating areas like industrialisation and other productive sectors.
He suggested that FBR should setup a Tax Intelligence Unit to check the income and expenditures of the elite class for recovery of due tax from buyers and sellers of property, owners of luxurious cars and those involved in transaction different businesses from different bank accounts.
People are regularly arranging lavished parties and expenditures should be proposed in such cases. Riaz Fatiayana MNA proposed tax on spiritual practitioners (Peers and Faqeers), who are making money in major cities and their income should be taxed.
Shahid Khakan Abbasi, MNA proposed to abolish income tax as this levy is only targeting salaried class and few industrialists and majority of the rich are not under its ambit. Mian Abdul Sattar, PPP MNA suggested the FBR to auction the tax collection targets at the level of Union Council to bring in the tax net those people who are not paying the tax.
Chairperson Fauzia Wahab said that out of 170 million population only 1.7 million are taxpayers. She said that the Federal Cabinet's decision of February 10 to present Budget proposals to Parliamentary Committees by May 2010 to allow in-depth budget review and input by Parliamentary Committees was a triumph of efforts of all Parliamentarians over the years to reform the Parliamentary Budget Process.
Some of the members of National Assembly Standing Committee on Finance opposed tax exemptions given to army personnel. They claimed that land within the jurisdiction of the cantonment areas belongs to the federal government.
It was granted to the armed forces for construction of defence related buildings and establishments like barracks, but cantonment boards have been converted into commercial property. Tax should be applicable on the residential and commercial properties in the cantonment boards. Senator Haji Mohammad Adeel pointed out that land of the cantonment areas belong to the federal government and the army personnel should pay taxes on the same.
The armed forces should play their role in increasing the Tax-to-GDP ratio. In this regard, the Land Procurement Board Act in the cantonment areas needs to be revised. MNA Kashmala Tariq of PML-Q was of the view army personnel having more than one house should be liable to taxation. In this way, armed forces could help in increasing Tax-to-GDP ratio.
Copyright Business Recorder, 2010
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