Abolishing the present – income tax system – III
(This is the CONCLUDING article in a series on the subject).
e have shown in the last article that by taxing the Rs 150 billion credit advanced in the present financial year by the scheduled banks of Pakistan at a flat rate of 10% at the time of disbursement of advance, income tax revenues amounting to Rs 15 billion could be collected at source, without the need of an Income Tax Department. This is in sharp contrast to the targeted Rs 15 billion this year, achievable only (and MAYBE) after paying a fair percentage, estimated at Rs 2-3 billion, for the upkeep of the Income Tax Department. Our basic premise is that in order to obtain a credit any corporate entity has to show a minimum 15% profit on investment, working through various financial permutations and combinations, this translates into a 12% taxable income or 6% of the total investment. Keeping the average commercial debt equity ratio of 60:40, this works out to a flat 10% of the debt (or the credit advanced by the bank).
At this time the levying of Income Tax, however “simplified”, defies adequate description, to the layman it is almost impossible to understand. The necessary paperwork, the incentive-oriented investment, etc may be acceptable basis in any society where returns can be monitored and verified, in Pakistan it becomes an invitation to commit chicanery. When you consider that despite all the electronic means in the world for close monitoring, the Internal Revenue System (IRS) in the United States is regularly finagled, one can realise the enormity of problems facing tax collection in Pakistan.
The present income tax system incorporates the philosophy of the ability to pay imposed primarily on the efficient and the successful or the salaried class, this is totally unjust because it keeps out of its purview the large agriculture class, nominally we are attempting to tax the few so that they take on, Atlas-like, the burden of the majority. When most of our legislators are tax-exempt being agriculturists, one does not expect altruistic initiatives by them but on the other hand we must devise some means to make the tax imposition equitable to and on them. At this time our law-makers sit on judgement on how to disburse government revenues without paying taxes themselves, no wonder they attempt to take the largest slice of the pie as largesse for their own constituencies.
Essentially income taxes imposition started as an imperial requirement. Because the systems are more accountable, the tax levy continued to be an equitable source of revenue in western countries, but one which was subject to constant abuse as human ingenuity defied the system for personal gain. One of the problems of imposing income taxes is that it turns away possible investment. By having no income/corporate taxes, we shall in effect, despite the imposition of municipal taxes and octroi charges, become in effect a tax free country. Psychologically this would give a tremendous boost to Pakistan as a potential tax-free haven. This would invite foreign investment, would create jobs, job-availability gives indirect revenues to the government.
By taxing credit at source, we are (1) removing the chances of chicanery and (2) making credit available to those that have the confidence that they can repay the credit. Naturally, this imposes the onus of making that credit work into a profitability scenario on those obtaining the credit. Arguments are likely to be raised that this would impose an unjust penalty on the unsuccessful regardless of the outcome of the venture, in fact that is a negative approach which has been very detrimental to our breaking out of the present bureaucratic economic-vise. If one does not feel confident about making a profit, then that uncertainty should not be passed onto the lending institution, the credit advanced or the creditors cannot be held responsible for the inefficiency, lack of business acumen, bad judgement, bad luck, etc on the part of the businessman. The businessman should understand that any venture has inherent risks and decide whether he is confident of taking on the option of having on flat tax of 10% deducted from the advances made to him by any financial institution.
With the doing away of income taxes, individuals and corporations may turn to self-financing to avoid paying the proposed flat credit tax, well so much the better, there is so much of a credit squeeze on at this time that there will always be potential borrowers in plenty. Given the percentage that the loan sharks earn, the recognized financial institutions will remain the main source of credit. On the other hand, the removal of income tax will act as a force-multiplier for savings which at the moment are out in the cold, two or three multiple times the cash in the banks will come back to the four-cornered security of the scheduled banks and investment institutions, thereby making that much more credit available for disbursement to the deserving.
One estimates that in the first year after the removal of income taxes, the credit disbursed will double to about Rs 300 billion, thereby giving the government a potential revenue of Rs 30 billion, thereafter as the security of the measure sinks into the psyche of the general populace, this may be multiplied to government revenues of Rs 100 billion in the third year or so — without the help of an income tax department. Of course, many things need to be streamlined, including (1) lining up employment for a whole lot of personnel of the Income Tax Department who would be rendered jobless (2) a penalty tax on those debtors who have misused the credit for purposes other than intended and (3) procedures to be followed in the system change-over.
There are only a couple of months till the present Federal Budget is formulated. The People’s Government needs to take positive moves about radical changes to rejuvenate the economy. There is nothing more dynamic than contemplating the abolishing of income taxes. The PM has a high-powered Consultative Committee of Economic Policy, while it was not possible to have any feedback from Mr Feroze Qaiser due to his non-availability, one did get to have detailed and refreshing discussions with Mr Naeemul Haq, one of the members of the Committee. From the trend of the arguments Mr Haq came across as a forceful advocate of financial restructuring and reform and it is expected that he will take up cudgels on behalf of those few being unjustly penalised at this time for the “crime” of being educated and/or successful. A high-powered seminar should be organised at the earliest convenience to consider the means of introducing this system before the next Budget, it would be a tremendous feather in the cap for Ms Benazir, she is an ardent advocate of reform of any kind, particularly that concerning the economy.
Our greatest problem is that the parallel black economy will resist all moves to merge with the official version. By creating what amounts to a tax-free haven, the many ills of a parallel black economy on our society can be overcome and the development of a healthy socio-economic fabric instituted, one that is not based on trying the impossible i.e. taxing the earning and wealth that needs to be hidden by all the means at the disposal of the individuals and/or corporate entities, making them into compulsive cheats. This would greatly enhance the moral fabric of the nation. While the intelligentsia and salaried class will welcome the recommendations to abolish the present income tax system, a cabal of income tax bureaucrats and industrialists will oppose this tooth and nail. The income tax officials resentment is understandable, one must take into account that most of our big industrialists are subsisting on large bank loans and adoption of a radical new approach would affect them (1) in obtaining fresh advances (2) by making them pay the real taxes for the first time. The opposition will be joined by (1) those bureaucrats who fear any change because that would mean a loss of their imperial power and (2) even the senior banking officials who would suffer individually because of the restricted kickbacks they get on advances as a result.
A few articles in a newspaper cannot serve as a complete all embracing solution to revamp an entire system that has been in vogue for decades. All this needs refinement by more experienced financial minds but the suggestions in the aforementioned analysis and recommendations provide concrete suggestions for dealing with the main cause of our parallel black economy and related ills while drastically reducing the size and cost of the tax collection machinery. We must implement immediately this proposal for taxing credit utilisation instead of taxing income and thus relieve the hapless salaried class and the successful/efficient minority. We are a free democratic country within the Third World, we have no inherent obligation to maintain obsolete imperialist tax collection philosophies. The system suggested as an alternate is not to be used as an experiment, Pakistan must go in for outright overhaul of the present corrupt status of our tax collection machinery. People talk of innovation, let us make it into a fact by abolishing the tax system and replacing it with a simplified version for collecting government revenues.
Among the radical reforms Ms Benazir must effect to eradicate bribery and corruption, this one requires far-sightedness and courage beyond compare.
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