Sep 19, 2010

Revenues for rehabilitation

Plans should be made by the government to tax the rich to generate relief funds

By Huzaima Bukhari and Dr. Ikramul Haq

Central and provincial governments seem to be confused about how to generate sufficient funds for flood relief and rehabilitation of people affected by this catastrophe. There are also disagreements about the method and mechanism for distribution of money received locally and from abroad. Prime Minister Yousaf Raza Gilani, while addressing the National Assembly on September 4, 2010, informed the legislators that the Council of Common Interests (CCI) would decide the issue of distribution of flood relief funds among the provinces. He, however, did not disclose any plans for generation of funds by taxing the rich and mighty to meet the cost of relief and rehabilitation, which according to him, was in the range of Rs300 to 500 billion.

The dilemma of our governments is that they are not willing to impose taxes on the people who are accumulating wealth and doing nothing for the welfare of their fellow countrymen. It is not all difficult to raise funds of over Rs500 billion by introducing new Emergency Tax Amendment Bill 2010, but in the current session of the National Assembly the public representatives appear more interested in blaming each other.

While the government has failed to perform its duty of introducing emergency taxation measures in the House in the form of a bill, not a single member from the Opposition raised this point. This shows the callousness of our legislators towards the masses who elect them and expect them to work for their betterment.

The government is keen to borrow more from local and foreign sources -- knowing well that already debt-to-GDP ratio has crossed the danger mark. It is shocking to note that both the Ministry of Finance and Federal Board of Revenue (FBR) were not issued any instructions to prepare a new Tax Amendment Finance Bill to levy flood surcharge on importation of luxury items and introduce excess profit tax on sectors that have earned extraordinary profits e.g. sugar, cement, flour mills and the banking sector.

The government's financial managers, instead of doing any work on new tax bill were busy in preparing for talks with the IMF that miserably failed in Washington on September 2, 2010. The Fund refused to give relaxation on the levy of reformed General Sales Tax from October 1, increase in power tariffs and giving autonomy to the State Bank.

This led to another delay of at least three months in the release of next tranche of US$1.7 billion and suspension of the programme till December 2010. They managed to get just US$450 million emergency flood assistance. The visit cost of 17-member Pakistani team was over Rs10 million on three heads alone -- travel, accommodation and food. At that time millions in Pakistan in flood-affected areas were homeless, foodless and suffering from various ailments and many more were preparing to leave their homes.

The federal government is not at all ready to impose excess profit tax for tax year 2009 for which returns are due on September 30, 2010. If this is done we can easily raise substantial funds for relief work. On the contrary, it is planning to levy 5 percent flood surcharge on all imports. According to Press reports, the plan to impose flood surcharge is ready and would be implemented soon. The spokesman of FBR, Mr. Asrar Raouf (Member Direct Tax Policy), when asked about the levy of flood surcharge, told a newspaper that they had not received any instructions in this matter. However, he said that FBR was planning to raise additional revenue of Rs336 billion to achieve the target of the current fiscal year.

It is clear by now that even in the aftermath of the great tragedy, the governments have no plans to tax the rich and mighty. Indirect taxes -- levy of flood surcharge will be part of it -- are increasing inflation pushing more and more people below the poverty line. The provincial governments have also failed to levy agricultural income tax on the rich absentee landlords--it could have generated revenue of Rs. 200 billion. They are demanding funds for flood relief measures from the federal government, but have shown no inclination to generate funds themselves by introducing emergency taxes on the rich people and on unproductive transactions -- buying and selling of plots, currency swaps, luxury cars and other goods, etc.

Mr. Gilani admitted in the Assembly that "no funds have been transferred so far to any province from the PM's Relief Fund, which received donations worth Rs4 billion". The other day, he accused non-government organisations (NGOs) of misappropriating funds, but claiming now that "out of the total $1.03 billion assistance that had been pledged so far, 80 percent would be spent through non-government organizations". He informed the House that Rs40 billion were allocated for providing Rs20,000 to each affected family, while Rs 12,000 each would be provided to flood victims under the Benazir Income Support Programme (BISP) for three months. These plans -- still on papers -- are not only inadequate but also confirm the unwillingness and inability of the government to deal with the challenge. It would have been much better to immediately tax the transactions undertaken by the rich and put money straight into an earmarked fund to be utilised exclusively for the relief and rehabilitation of the flood affected people and areas.

For the current year, the following three measures alone can generate over extra revenue of Rs300-500 billion:

Excess profit tax on cement, sugar, flour mills, banking and telecom sectors should be levied. It would generate extra tax of Rs200-250 billion.

Immediate announcement of one-time de-logging litigation scheme for taxpayers to pay 25 percent tax arrears between 15 September 2010 to 30 June 2011 whereby cases pending before appellate authorities and courts could deem to be settled. In 1998, India, through a similar scheme called 'Kar Vivad Samadhan' generated revenue of Rs900 billion, while disposing huge backlog of cases in the country. Such a scheme with time limitation up to 30 June 2011 would not only generate immense revenue (not less than Rs100 billion if properly drafted and publicized) but would also help win the confidence of taxpayers as well as drastically reduce workload in Tribunals and High Courts.

Section 11(4) of Income Tax Ordinance, 2001 protects tax evaders and criminals. This has destroyed the entire social fabric of the society. Genuine taxpayers are discouraged. This should be amended and on certain remittances say exceeding Rs50,000 (poor workers working abroad send meagre amounts) tax deduction of 15% should be imposed. This way huge revenue of at least Rs200 billion could be generated.

The above three measures alone can generate funds of Rs500-550 billion which our Prime Minister is seeking for the relief and rehabilitation work. It would not burden the common people as incidence of tax would fall on the rich and the mighty. On the contrary if 5pc flood surcharge is imposed on all imported items, it will increase inflation, raise the prices of essential commodities and make our exports more incompatible. It is not at all advisable. The provincial governments can also raise substantial revenues by levying taxes on the rich absentee landed class -- guilty of removing and breaching dykes to save their lands while diverting flood waters towards the poor inhabitants living in villages and cities. They should also impose transactional tax on unproductive dealings in real estate and expenditure tax on luxury consumption (people are paying millions to five star hotels for social events).

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