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Thinking taxation

Admittedly, the title even sounds repulsive; after all no sane person, given a choice, would wish to embroil his medulla oblongata in the wasteful pursuit of taxation matters, let alone paying this abominable levy, whose origins lie in the ruling class’ enslavement of the ruled class to pay for the former’s unbridled largesse.

Having alluded to this particular insight in earlier write ups, it has become expedient to clarify the class system. Globally, in any country, there are only two classes, the rulers and the ruled, all of the rest, including the much touted middle-class, no offense intended, have been created by the former to keep the latter guessing!

Rhetoric aside, with a promise to some day revert to the debate on the class system, taxation policy is not only about appropriating the hard-earned sustenance of the working class to meet excessive expenditure of a disproportionately large governance structure, and it is much more. In its most efficient application, taxation policy can be a catalyst for nudging resources, directly or indirectly, towards economic growth. In its most parasitic usance, inflation, it is fatalistic. Unfortunately, the masses are unable to comprehend why inflation is a tax. Assume that the government borrows, through national savings or banking deposits, Rs 100, and assume that at that point in time Rs 100 could buy 5 apples. If the government, repays its debt after one year during which period inflation was say 40%, in essence the government took 5 apples and returned 3! Accordingly, inflation suits the government, albeit the risk is that if the masses ever become cognisant of the adverse impact of inflation, they will end up eating the 5 apples when they can, leaving nothing for the government.

Curiously, the government is for some reason confident that the masses will never catch on, since irrespective of the fact that real return on deposits has been negative, ignoring official statistics, for what seems like eternity, the tax collector ensures that he also gets his pound of flesh from return on savings. Real return is what is left of interest income after adjusting for inflation; accordingly if inflation is perceived at 20% and interest income is less than that, the depositors are loosing some part of their apple every year, until nothing will be left! On the same principle, if the value of investment in property and stocks doubled over 5 years but annual inflation was 20%, it is a losing proposition. And why did property and stock values increase in the first place, well for the same reason inflation thrives, more money chasing the same or lesser produce.

With another promise to revert someday to a debate on the monetary policy and explain this particular truism, reflections continue with the task at hand. It would appear prescient that if the government was indeed interested in increasing the rate of investment in the country, it would, in the first instance, endeavour to enhance the rate of savings; taxing interest income is definitely not the way to go about this. Serendipitously, since the government fears that an educated populace might stumble upon the harmful effects of inflation, it has also taxed tuition fees paid. If the leadership was serious about a flourishing highly educated next generation, it might have, contrarily, considered providing tax credit for school fees. In addition to the fact that tax provisions appear to be encouraging an uneducated spendthrift nation, the policymakers also seem to be struggling with utilising taxation policy for strengthening the rupee. What might come as a surprise, to the opponents of amnesty schemes, is that the tax laws already provide immunity from inquiry and hence taxation, on foreign exchange remittance which are encashed into rupees through the banking channel. Considering that inward remittances have over the past decade become critical for managing the trade imbalance at the very least, a historical analysis of pros and cons of this particular provision, including comparing the tax foregone with economic benefit derived in the form of higher foreign exchange reserves, could be invaluable in determining future strategy. Coupled with an interactive brainstorming session with all stakeholders, this tax provision could be modified to facilitate and enhance inward remittances. On the other hand marginalizing sanctity of banking transactions could have an opposite effect. Individual taxpayers and small businessmen will be perturbed to know that every company gets a 10% credit in its tax liability for any amount spent on purchase of plant and machinery, is that discrimination or what?

Nonetheless, an educated trend analysis should establish whether or not the provision spurred capital investment or simply reduced tax liability of corporate Pakistan. If it did have a positive impact, perhaps it can be extended to other businesses. By the way, in this particular case please note, that the capitaloutlay could easily be financed through the nations deposits held with banks, and still get a tax credit!

With the unemployment rate sinisterly on the rise, encouraging entrepreneurs to invest in new businesses should indeed be a top priority. Taxation laws do provide a 5-year tax credit for industrial undertakings set-up with 100% equity, if certain other conditions are met. Why is it a credit and not a tax holiday, and what exactly is the difference, and what other conditions, and who adjudicates whether these are met or not, are a few questions which every aspiring benefactor of this particular clause is most likely struggling with.

Curiously, why should it be 100% equity when historically very few, not that one can recall, projects were set up on this principle. And why policymakers believe that the documented economy has sufficient money just lying around begging to be utilised in projects which provide a 5-year tax credit is befuddling. If creating employment was the objective, why was there not a condition for employing minimum number of white collar employees? Once again a detailed analysis might provide some feedback on the efficacy of the provision, but considering other market indicators, the desired objective is far from being met. If the intent is to provide a tax incentive for a desired outcome, then the policymakers need to ensure that the related legislation is precise, concise and adheres in spirit with what was conceived. If tax provisions are perceived as a labyrinth of legal disputes rather than a reward for assisting in government’s economic policies, there will be no takers. The readers might have observed some contradictions between the comments and suggestion on various aspects of the tax policy, which is exactly the reason why tax policy requires a proactive thoughtful approach; what might work in one case might be a disaster in another.

Note that even enhancing tax rates, which may appear so simple, is a complicated strategy, since money appropriated from the private sector will no more be available for investment. Balancing the budget is a noble objective, but not at the cost of stagnation.

To conclude, within taxation policy, governments have multiple options which when properly thought out and carefully implemented can go a long way in bringing in economic stability. What is needed is a proactive and visionary mind set at the policy level. One can hope that as things settle down, the incumbents will review tax provision beyond a tax collection perspective.

Syed Bakhtiyar Kazmi, "Thinking taxation," Business recorder. 2013-09-23.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic planning , Economic development , Economic growth , Economic stability , Tax policy , Foreign aid , Taxation , GDP , Pakistan