Sunday, December 02, 2007
By Sajid Aziz
THE NEWS
Doubts exist among consumers about the Islamic banking being practised in Pakistan, the growing popularity of this mode of banking and finance in the country and other parts of the world notwithstanding. People mainly raise the question, is it really Islamic? Those who raise questions about the authenticity of Islamic banking are, undoubtedly, firm believers in Islam, the Islamic economic system and the unity of the Muslim Ummah.
Eminent Islamic scholar and the chief of the Tanzeem-e-Islami, Dr Israr Ahmad, says: “Islamic banking is no different from the interest-based conventional banking. The Islamic banking being promoted and practised in Pakistan is nothing more than a fraud.”
He says second Caliph Hazrat Umar Farooq, in the light of Prophet Muhammadís (Peace be upon him) sayings, had ruled that any deal/business where there is a doubt about the involvement of usury/interest should not be accepted.
The argument as to whether Islamic banking is really Islamic has two different facets. First, whatever is being practised under the name of Islamic banking is apparently quite similar to the operations of a conventional financial institution, so it creates doubts in people’s minds and they ask on what grounds we can call it Islamic? So they feel that it is merely a change of name and documents and, in fact, it is no different from conventional banking. The second facet of the question is more important and pertains to the socio-economic factors associated with the overall Islamic financial system. Due to significance of these objections, we will discuss these two issues before looking on other arguments.
Merely a change of name and documents: Omar Mustafa Ansari, a prominent scholar and the author of a book on Islamic finance namely “Managing Finances ñ A Shariah-Compliant Way,” says the most common and most discussed argument against contemporary Islamic banking is that there is “no difference” between conventional banking and Islamic banking and it is merely a change of name and documents.
The second argument, which is actually derived from the first, is that even in Islamic banking the most common products being used, eg, Morabaha, Musawwama, Salam, Istisna, Diminishing Musharaka and Ijara Muntahia Bittamleek are based on fixed return. Even the Musharaka and Modaraba based products are engineered in a way that the profits are ‘virtually-fixed.’
Ansari says that one should realise the fact that unless we can distinguish an Islamic bank from a conventional bank, it would be difficult for us to rely on the former. It has been observed that Islamic banks try to ensure that their products are similar to those offered by conventional banks in all respects, even if for that purpose they have to incorporate a few provisions in products that are not considered to be good or a few of them are considered Makrooh (permissible but undesirable). In addition, Islamic banks’ endeavours are geared towards minimisation of their risk in every possible way, thus the essence of Islamic finance which is based on risk-taking is killed.
Most importantly, it should be borne in mind that in some areas there is a very thin line of difference between Haram and Halal. For example, by only saying aloud the name of Allah Almighty on an animal while slaughtering it makes it Halal and permissible and without pronouncing the name of Allah the meat becomes Haram. Likewise, by uttering a few sacred words in the presence of a few witnesses a man and woman become lawful man and wife.
Similarly, if a transaction can be engineered in a way that it becomes Shariah compliant, then we should not conclude that it is Haram only due to its resemblance to the interest-based financing, he says.
“Also, it is pertinent to note that since the Islamic financial services sector is in its infancy when compared with conventional banking, we unfortunately have to follow the conventional system in the pattern of financial products and are still not in a position to develop totally new financial services. Over several centuries, the conventional banking system has acquired a good understanding of human needs and psychology and has invented a considerable number of financial products.
For example, if they have running finance and overdraft as a financing tool, we have an alternative to it in the form of Istijrar with Morabaha or Musharaka based running finance model. Similarly, if they use finance leases as a financing tool, we have made it Shariah-compliant through Ijara Muntahia Bittamleek, or Diminishing Musharaka. These are only two examples. The list is long and for each interest-based financial product, except for those explicitly Haram, more than one alternatives have been formulated,” says Ansari.
No one can argue that fixed return-based banking, although being Shariah compliant, is not in keeping with the tenets of Islam. In addition, Islamic banking as being practised at present focuses more on consumer finance than on catering to the needs of SME and agricultural sectors and micro-finance, so it is not contributing enough towards a “just and equitable monetary system” that Islam desires, he explained.
Is it Heela banking? It is being discussed at various forums that contemporary Islamic banking is based on Heelas. From the perspective of Shariah, people take recourse to Heela to circumvent what is proscribed in religion. Those having an insight into the industry cannot disagree with this argument to a certain extent, as it has been observed that certain transactions are based on Heela.
The charge of Heela cannot be levelled on the entire industry. We should acknowledge that the industry is primarily based on the principles of the Holy Quran, Sunnah and Fiqh. It is worth noting that mostly a Heela is applied in the “execution of a transaction” rather than “designing of a transaction.”
In other words, we can safely conclude that the application of Heelas in Islamic banking is not due to any weakness due any weakness in the theories of Islamic banking, but actually it is entirely a matter of misuse/ misinterpretation of basic Shariah guidance in respect of various Shariah-compliant financial transactions.
So it becomes imperative that in order to support the growth of Islamic banking and finance on right footings, we should strengthen the Shariah-compliance mechanism for the industry. Also, there is the need to eliminate Islamic financial products that have the potential of misuse.
Use of interest rate as benchmark: is it Halal? Critics, including scholars and economists, say that most International Finance Institutions, while providing financing by way of any of the ‘Halal’ transactions, determine their profit rate on the basis of the current interest-rate benchmarks prevailing in the conventional money market. Scholars are of the view that by applying these benchmarks the Islamic banking industry makes their transactions ‘similar’ to interest-based transactions and, as a consequence, these transactions become doubtful from the Shariah point of view.
Economists say this makes these financial institutions a part of the prevailing capitalistic economic systems, so such transactions go against the tenets of Islam.
This issue, however, needs to be addressed by the government as well as the market players. A strong Islamic inter-bank market may provide us opportunities to develop our own benchmarks for Islamic banking operations, Ansari concludes.
Sunday, December 2, 2007
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
25/11/2007
By Huzaima Bukhari and Dr Ikramul Haq
THE NEWS
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.)
25/11/2007
By Huzaima Bukhari and Dr Ikramul Haq
THE NEWS
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.)
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