BUDGET 2009-10 MAY FOCUS ON TAX REFORMS

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
May 25 - 31, 2009

Under a tight stress of making available sources of revenue within the present tax regime, perhaps this government is all set to touch hitherto untouchable economic sectors in the upcoming budget 2009-10 in order to raise the percentage points of tax to double digit. Tax to GDP ratio would remain below 10 percent until the end of current fiscal year given the total tax revenue collected during the first ten months. That how this over ambitious goal would be achieved remains to be seen.

While the tax structure has its own inherent flaws leaving low base as only option to generate direct and indirect taxes, the government seems bent upon enveloping sectors: real estate, stock exchange, services, and agriculture in the tax net. These four sectors were identified for purpose of taxation, reportedly said Information Minister Qamur Zaman Kaira. However, the government's intention of levying taxes especially on capital market transactions and income of agriculture is unclear, as the minister was not outspoken about the Cabinet's decision in this regard while talking to media after the federal cabinet meeting on Wednesday.

The government's stance, overall, has not been clear-cut too in past when last year the issue of taxing income from agriculture sector came on to the front. In fact, the proposal received unequivocal backlash from parliamentarians that compelled the government to stop implementing the proposal. It is noteworthy that Punjab Assembly passed a resolution against agriculture income tax last year. It was however unknown that why this proposal was unanimously rejected by opposition and ruling parties. Was it because the tax was encouraged by the International Monetary Fund or was it because the tax could have directly harmed the stakes of members of parliament, powerful among them belonging to the sector?

Agriculture is referred as a fertile tax revenue source because of its major contribution in total gross development products of Pakistan. Due to this simple fact, tax on agriculture income always is brought under discussion that has never taken off from the table. By associating tax with the performance of crop production, the minister further created doubt over the possibility of agriculture tax imposition in the next budget. Deliberate attempts of recording under performance escape many of genuine volume-based taxation. What can curb this practice of disclosing poor crop production in the agriculture sector?

A similar kind of tax amnesty is enjoyed by capital gain on shares in stock exchanges despite that monetary transactions in exchanges have probably no parallel. Earning through shares trading goes untaxed in the pockets of high net worth clients or individuals, in a way depriving national economy of its windfalls. Not once but many a times proposal of capital gain tax has surfaced and recoiled and every time before the budget it is dutifully singed, notwithstanding the news that capital gain got amnesty until 2010 has been in circle in concomitant. That shows the pinnacle of confusion regarding ensnaring unchained quartet right in to the middle of labyrinth tax system. That in spite of all its intricacies cannot exonerate main sectors from responsibilities towards economic participation that is tax paying is.

As regards real estate sector, any new tax will not only expand tax base, but it also paves a way to documentation of large unregistered realty transactions that beget the likelihoods of corruption and public fleecing. However, spadework to pinpoint potentialities may pose serious challenge owing to the huge undocumented economy of real estate sector. Data bank is far from sight even though departments at provincial and district levels are separately dealing with land records management and revenue. Maintaining records manually increases the risk of malfunctions. Though computers are used unless new technologies are operational in large scale that how effective tax plan will prove is a question. To some extent, counting physical assets is not as difficult as recognizing intractability underlying in services, the sector that is expected to be covered widely in new taxation.

Services sector is the biggest contributor in GDP of Pakistan. Comprising of wholesale and retail trade, transport storage and communication, finance and insurance, ownership of dwellings, public administration and defence, and community, social, and personal services, the sector contributes directly or indirectly significant tax revenue. Nevertheless, some services that are out of government levies completely or make little contribution towards tax revenue pool are making government to come up with stringent plan to encircle them. Perhaps, government may impose taxes on retailers and wholesalers. If this happens, then consumers will bear the brunt unless government ensures that new tax (es) will not impregnate price for end consumers.

Government may take information technology and defence out from the tax protected quarantine to administer tax potion gradually to the service sector. Because, levying further taxes on taxpayers would worsen public miseries as well as weaken the struggling of industries to rise above the crisis that has dampened the industrial growth. A new tax means bang on consumers who are still under immense pressure of sales tax of 16% on both goods and services. A more reasonable proposal of increasing tax is presented in the Budget Proposal 2009-10 document prepared by Overseas Investors Chamber of Commerce & Industry. It says that tax base be broadened instead of levying new corporate taxes, which are still highest in the region. This tax base can be expanded with the help of minimising tax evasion.

Without taking non-traditional actions in terms of taxing these sectors, it is very unlikely that the government can achieve the goal of increasing tax revenue to a level equivalent to expenditures and getting rid of fiscal deficit. Certainly, broadened tax base will widen fiscal space that makes money available for spending on social development.