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Need to boost national savings

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Economic survey reveals that national savings declined to 11.1 pc of GDP in 1998-99 from 14.2 pc of previous year

From Shamim Ahmed Rizvi, Islamabad
Sep 20 - 27, 1999

While there is a dire need to boost national savings to sustain the development programme which has been emphasized in the 1999-2000 budget, the rate of National Savings Schemes (NSS) is constantly on the decline mainly because of government policies.

The economic survey 1998-99 had revealed that the ratio of national savings declined to 11.1 per cent of GDP in 1998-99 as against 14.2 per cent in the fiscal year 1997-98. This called for special measures to arrest this declining trend and boost savings. According to a survey, conducted last month, there had been a sharp fall in savings in the first two months following the reduction in the rate of profit. As it was not enough, the Finance Minister has now announced a levy of 10 per cent income tax on some national savings schemes which were hitherto exempted from such a tax. It appears that the Finance Minister, in a bid to raise revenues, specially after being slammed by the traders community has lost all sense of balance. The imposition of a 10 per cent withholding tax on all National Savings Schemes is apparently part of the government's attempt to raise revenue from wherever source possible. However, it is more a debt management measure than a fiscal, for it involves the government's non-bank borrowings, and indicates the government's desire to reduce its debt servicing burden. In practical terms, the government is not going to raise any revenue, except as an accounting convention, but will be reducing expenditures on debt servicing by showing the same amount paid as before, while increasing the amount shown on the revenue side. For investors in NSS, since the schemes offer returns ranging between 14 to 18 per cent, the income tax deduction means a reduction of the return by an average of 1.5 per cent, which follows the 2-point cut that came in the budget. Further, where the budget rate cut applied only to new savings, the withholding tax applies to previous deposits, which continued to enjoy the higher rates, and has brought them down by about 1.5 per cent.

The new measure was not a part of the Finance Act, 1999 but has been enforced in the post-budget "adjustments" by the federal government. Previously, only the Regular Income Certificates of the National Savings Schemes were taxed under the Income Tax Schedule. No reason for undertaking the new measure has been given. However, the factors which might have led to this decision are the weak budgetary position of the government and the consistent campaign by the bankers for lower profit rates on National Saving Schemes to help arrange a level playing field.

All the government arguments, though valid to a certain extent, are not without flaws. At the end of September 1998, the outstanding deposits in all the national saving schemes, excluding prize bonds and Regular Income Certificates, stood in the neighbourhood of Rs. 327.9 billion. This means that total additional tax collection from this source will not exceed Rs. 650 million per annum. The amount could shrink in future if new tax measure triggers a net outflow of money which is likely to be the case because of a sizable reduction in the rate of return by about 3.5 per cent in a short period of time. While the amount of taxes, expected from this source, is small and unlikely to increase, the new measure in itself is inequitable and would discourage saving habit. It is well known that in general, ordinary people with small means deposit their savings in the NSS to supplement their incomes, while rich people have other avenues of investment. The fiscal situation demands that everybody should be asked to make a greater contribution to the national exchequer, but the axe generally falls on the poorer or middle class sections of the society. The powerful groups or lobbies in Pakistan always find an easy route to escape the tax net. Even the important leaders in the government and opposition and the members sitting in the assemblies, who are generally very rich and are supposed to be seen standing high and setting a healthy trend, use every trick in the book not to pay tax.

The investors in these schemes are mostly old, retired persons, widows, and social welfare organizations. This group also includes thousands, thrown out of jobs during the recent downsizing drive of the government and those affected by the freeze on the foreign exchange accounts, and other people of small means. They had put their life-time savings and money, paid against golden handshake, in these schemes to meet their day-to-day expenses. The purchasing power or these earnings, as of others, has already been seriously eroded as a result of inflation.

For a large number of people, earnings from the NSS are their main source of income. In these difficult days an abrupt reduction in earnings will ensure making living further difficult. True, there may be some big investors who may be reaping a big harvest of profit out of the attractive rate of interest and tax exemption of the dividend incomes from savings scheme investments. But they should have been excluded from the schemes in the first place by putting a ceiling on investment by a single individual. Instead, the schemes, which were meant for small savers, were thrown open to tax evaders. All bearer certificates that are liable to be used for profiteering and tax evasion deserve to be discontinued.

In spite of the painful effects of rising inflation and growing unemployment, the people with limited incomes would still be ready to accept more sacrifices and pay taxes if they are convinced that these sacrifices are evenly shared and the much-talked-about tax culture is being practiced by those who are most vocal about it. What they see is quite different: feudal lords, big businessmen and top professionals pay only a small fraction of what is really due against them. This is hardly a strong recommendation or an impelling motivating factor for the common citizens to pay taxes honestly and regularly. It goes without saying that moral authority for imposing and collecting taxes can be reinforced only if taxes paid by ministers, MNAs, MPAs and leading professionals like doctors, lawyers, consultants, and so on are made public as evidence of their sharing the burden of national housekeeping. A beginning in this direction must be made right now if tax culture is really intended to be promoted.

A comparison of savings and investment rate of Pakistan with that of other Asian countries is quite revealing. According to Asian Development Bank's Annual Report for 1997, while Pakistan's gross domestic savings and investment in relation to gross domestic product (GDP) were 14.2 per cent and 18.6 per cent respectively in 1996, South Korea had a rate of 35.2 per cent for domestic savings and 38.2 per cent for investment. While China's respective savings and investment rates were 41.4 per cent and 39.2 per cent. India, whose per capita income is significantly lower than Pakistan's, has gross savings and investment rates of 26.1 per cent and 25.2 per cent respectively.

Now examining the obtaining situation as currently prevailing on the national savings front, one is apt to become disillusioned by its counter-productive performance. As a national institution supposed to be engaged in the challenging task of promoting savings, it has a prime responsibility for helping positive and purposeful mobilization of the people's savings. This is the only sure way to promote capital formation, leading to the creation of sustainable base for industrial development. Having already evaded the grim consequences of heavy reliance on borrowing rather than savings it is time we get wiser about adopting a realistic approach towards promotion of National Savings.