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Gross Tax Anomalies

We have stated earlier that the proliferation of taxes and tax collecting agencies itself is a fertile ground for corruption but the avenues of corruption grow when each of these taxes is full of exemtions and anomalies. A brief description of a few anomalies in some major taxes will help understand the regressive nature of the taxation system and in-built provision for corruption.

Income Tax:

For years intellectuals and businessmen have been compaigning for an income tax on agriculture, unmindful of the fact that " income from agriculture", is only first of 180 total exemptions from payment of income tax provided in the second schedule of Income Tax Ordinance, 1984, as amended in 1996.

The list of exemptions from total income tax include Capital gain, amount received on sale of dollar bearers certificates, income from private foreign currency accounts and host of other incomes. "Export of certain goods" is partly exempted from income tax but the goods enjoying the exemption and the degree of exemption is not elaborated. However, according to CBR yearbook, 1994, earnings from 258 export items are liable to exemption in payment of income tax, at varying rates.

Besides tax holidays in the industrial estates and 180 total exemptions, the taxation system has in-built loopholes that help the rich and influential in avoiding payment of income tax. Thus, in 1992 boom year for textile, only 36 textile units paid income tax amounting to Rs 141 million and both Benazir and Nawaz Sharif accused All Pakistan Textile Mills Association (APTMA) of evading taxes.

A frank and candid response to why Pakistan's industrial barons are not paying income tax proportionate to their income was provided by industrialist Farooq Somar in an interview with monthly Newline, Karahi issue of October 1995. He was asked to comment on the fact that the entire textile industry pays less income tax than employees of one multinational.

" Under the tax laws prevalent in the country today, there is a thing known as "accelerated depreciation allowance". This allows one, for income tax purpose, to show a loss by claiming accelerated depreciation on new machinery. This is not evasion of income tax but avoidance of tax through legal means" was his reply.

Export Duties:

It is one of the most irrational set of duties at a time when govt's top priority is to increase exports. Ironically on the one hand, govt is levying duties on export, on the other hand, rebates are being provided to exports.

Export duties were introduced by Z A Bhutto govt in 1972 after the massive 110 percent devaluation to prevent windfall profits into hands of the exporters. But they have continued as a measure of revenue collection.

While an export tax is collected by the federal govt, the local bodies also collect export tax on goods exported from their municipality, whether for domestic consumption or export. The export tax paid to the local bodies is claimed by the exporters for refund and has again given rise to new avenues for corruption and pilferage. In the sub-chapter about rebates bonanza, we have already referred to the statements of Punjab Minister for local bodies Raja Mohammad Basharat Elahi that the contractors of the export tax and octroi owed millions to the govt in this head.

Development Surcharge:

It is another irrational and exploitative tax which was rooted in corruption and has given currency to pilferage of govt funds on a massive scale. The development surcharge was initially levied on fertilizer, natural gas and petroleum products and meant to "siphon off surplus profit of companies, representing the difference between the cost of production and fixed scale price, or between the average import price and the prescribed scale price of locally manufactured goods".

In simple words, development surcharge is levied on goods which are imported or produced cheap but are sold at high price fixed by govt. However, over the years the purpose and the very nature of the development surcharge has been distorted and its worst form it is now applicable on WAPDA electricity bills, at such an exorbitant rate that the amount of surcharge far exceeds the original bill for electricity consumed.

As is obvious from the name, development surcharge was meant to finanace specific development projects but ironically a large portion of receipts from development surcharge are refunded, by way of refunds for specific purposes. As for example, a large portion of development surcharge from refineries is refunded to marketing companies to cover;

A) transportation cost over and above the freight margin included in the consumer prices for the equalization of prices of petroleum products.

B) Imort cost of refined petroleum products over and above the ex-factory prices and

C) Operating charges of new storages constructed under government directives.

An estimated Rs 35 billion is expected to be collected by Development Surcharge on oil and gas during 1997-98. Meraj Khalid govt had estimated that price equalization fund alone was costing Rs 13 billion to the govt and therefore announced a time-frame for removal of freight equalization subsidy. The decision has been shelved and an eyewash of the former scheme is on the anvil under which petrol pump owners will be supplied petroleum products at ex-factory prices.

Capital Value Tax (CVT):

It was introduced in 1989 on transfer and sale of certain assets. CVT is payable when a property or an asset is acquired by individuals or companies. It was leviable on plots sold and alloted by develoment authorities, new and used motor cars and on urban property. The scope of CVT was expanded in 1996-97 budget, by levying it on air-tickets for foreign travel. It is charged at rate of 2.5% on immovable property, 1.5% on air tickets, at 1.5% on up to five year cars and 3.75 to 7.5% on 800-1600 cc cars.

Taxes for Rich

While politicians and bureaucrats talk in concert about the evasion of income tax they seldom raise hue and cry about the evasion and exemptions in taxes which are meant to serve a dual purpose raising public revenue and improving vertical equity. The wealth Tax, Capital Gain Tax, Estate Duty and Gift tax were all designed as leveler of wealth to prevent the rich from getting richer but over the years, their effectiveness has been eroded through exemption or they have been abolished altogether, without any qualms.

Wealth Tax:

This tax was introduced in 1963 and was payable by individuals, partnership firms, association of persons and private limited companies but public limited companies and state enterprises were exempted. Section five of the wealth tax act exempted agricultural land from payment of wealth tax but 1977 budget required payment of wealth tax by people having other income also.

Many countries have abolished wealth tax in favor of a progressive taxation system and in Pakistan also there has been a demand for abolition of wealth tax on the ground that it helps create black money. The biggest argument against the tax was that yields from wealth tax are not worth the hassle and administrative machinery assigned to collect it. The wealth tax is also used by the tax evader to camouflage their tax liability, since the amount paid as wealth tax is deducted from the total income earned, to determine the total income tax liability. (also see Robber Barons of Pakistan).

Capital Gain Tax:

As is evident from the nomenclature, the capital gain tax is payable by people making capital out of certain transactions. Thus if a plot is bought for Rs 10 lakh and sold for Rs 15 lakh then the gain of Rs 5 lakh is liable to capital gain tax. Same holds true about transactions on stock exchange. An exemption on Capital Gain Tax was introduced in 1975 which has remained enforced till todate.

More billionaires were made in Pakistan's bubble economy during 1990-93 on Karachi Stock Exchange than ever before but their gain remained untaxed because there was no capital gain tax. Similarly the real estate boom also went untaxed because of the same reason.

Estate Duty:

Estate Duty was enforced in 1950 under the Estate Duty Act, 1950 on the market value of all moveable / immovable property of a deceased person passing on to his heirs. It was charged on the property of the deceased after deducting debts and encumbrances legally allowable from such taxable properties. The duty was meant to prevente the rich from getting richer but it was abolished in 1979 without any convincing reason and rationale. The decision was believed to be politically motivated as the property-owning classes wielded influences on the government of the day.

The Gift Tax:

The Gift Tax Act, 1963 was designed to prevent avoidance of tax on income and assets by transferring them through gifts and envisaged that gift exceeding Rs 0.5 million made to sons, daughters, father and mother would be liable to tax. However this tax too was abolished in 1985.

Thus all the rich-persons related taxes have been abolished or made ineffective through seried of exemptions and concessions and burden of indirect taxes on common men has been increased.
 
 

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Table of Contents

Pakistan's Tax Web

Robber Barons of Pakistan