Direct taxation, spending and credit
(This is the THIRD in the series on the FEDERAL BUDGET).
Financial stability is based on credibility, Mr Ehsanul Haq Peracha has had such a miserable run on his lately that the only real surprise will be if he presents the Federal Budget to the nation. Having vociferously challenged anyone and her uncle to take the corrupt in her Administration to court, one hardly expected Ms Benazir to thumb her nose at the stinging judgement delivered by a High Court Judge on her Minister for State for Finance but perhaps Mr Peracha will serve a purpose, doing quite nicely as a post-Budget sacrificial offering to an aroused public. Mr Peracha may well be exonerated by the Supreme Court on any number of technicalities but Ms Benazir’s seemingly stubborn reaction is very baffling, to those who began to believe that maybe she meant every word of the ideals she speaks of so repeatedly, very very disturbing. Ms Benazir displayed amazing (??) naivete when she said a Stock Exchange is basically a non-profit institution, true, but the members stand to (and do) make millions in daily transactions.
The safe wager after the media exercise of the Pre-Budget Seminars has been that increased direct taxes are in the offing with a smattering of increases in indirect taxation. Ostensibly preparing the masses for bad news, the Government on the contrary trotted out fairly optimistic economic figures for the on-going financial year, aberrations being blamed upon the economic excesses of the past decade. While the past decade is best forgotten economically (and for various extraneous reasons), the economic downturn has continued.
The philosophy of direct Federal taxation has been a miserable failure. In 1977-80, direct taxes were Rs 5.5 billion out of total government tax revenues of Rs 32.5 billion (16.92%), in 1981-82, Rs 8.89 billion out of Rs 43 billion (20.67%), 1982-83 (18.7%), 1983-84 (17.26%), 1984-85 (17.33%), 1985-86 (16.26%), 1986-87 (13.38%), 1987-88 (13.31%), 1988-89 (13.16%) and 1989-90 (14.10%), averaging around 15%. The proportion of wealth tax as compared to income tax was also inordinately low, in 1979-80, it was Rs 0.33 billion out of Rs 5.5 billion (6%), 1980-81 (6.45%) and more in the same vein till 1988-89 (6.6%) and 1989-90 (6.18%), with Provincial collection more than double, sometimes slightly less than double the Federal collection. There can be no more damning statistics, everything is very wrong with our Federal Revenue assessment and collection effort.
In the Pre-Budget Seminars, some tough questions on this subject were fielded (and diverted) by some of our present and former senior bureaucrats (who bear responsibility for turning our economy into a real-life Mushaira, all fluent rhetoric, no substance) by reciting verses from Ghalib, Iqbal, etc, very effective filibustering. Some old-time and well-known hired guns, who in stage-whisper asides blamed the previous Martial Laws for our economic predicament, could not satisfactorily answer how many Armed Forces officers held posts from a Minister downwards to a Section Officer in Ayub’s, Yahya’s or Zia’s Martial Law regimes in the hallowed Ministries of Finance, Commerce or Planning. These Martial Law Regimes should, at the very least, be indicted for being plain stupid, violating one of the basic canons of soldiering, maintaining direct and firm control over critical ground. Those who control the purse-strings control their own (and the nation’s) destiny through the dishing out of largesse in the form of public money and governmental sanctions at their own sweet will.
A laughable total of Rs 1.07 billion Wealth Tax was projected to be collected all over Pakistan in 1998-89. Let us take Defence Housing Authority (DHA), Karachi falling under the Clifton Cantonment Board (CCB) with respect to Property (Wealth) Tax only. Even if a flat tax of only 1% (or a percentage of the assessed rental value) was to be imposed on current market value on the 10,000 residential units in DHA, average value Rs 2 million, this would amount to a collection of Rs 200 million (or Rs 0.2 billion) annually. With 200,000 such residential units in Karachi, the tax collected would be between Rs 2-3 billion, more than double the present total NATIONAL revenue collection of Wealth Tax! The collection from Sindh Urban areas alone would come to about Rs 7-8 billion with a similar amount, if not twice more, coming from the owners of agriculture lands, a mind boggling total of Rs 15-16 billion annually from Property (or Wealth) Tax alone in the Province of Sindh. Similarly each Community would collect a Community Tax from its inhabitants which would be based on their assessed income, who better than the neighbours to assess your real worth? Given that Rs 200 million would be collected in DHA in both Community and Wealth Taxes, by a suggested 50%-25% formula (50% at the first stage, 25% on all other stages) of withholding revenues for local expenditure, Rs 100 million could be kept for annual running expenditures of the area as well as maintenance of social infrastructure. A significant amount would be retained for the Community itself, a direct relationship between taxation and spending. The next tier, the Sub-Division would retain 25% ie. Rs 25 million and give the balance Rs 75 million to the District. The District would retain Rs 18.75 million (25%) and give Rs 56.25 million to the Division which in its turn would retain Rs 14.06 million (25%), the balance of Rs 42.19 million or approximately 26% of the original tax going to the Sindh Province. Sindh Province, which has a grand total of 773 councils (including 8 Cantonment Boards), should thus collect a total of Rs 15-16 billion @ approximately Rs 20 million average per Union Council, if not more. On an average Rs 11-12 billion is thus directly available to the Communities, Sub-Divisions, Districts and Divisions for all their running expenditures of General Administration and Social Services. Social Services must operate on the ONE DOWN formula e.g take Health Services, Sindh Province must construct and manage hospitals at Division level, the Division at the District level and so on down. The analogy remains the same for Educational Services, electricity, gas, water, transportation services and telecommunications. The Province will be responsible for all designated Provincial Highways, the Division for Divisional roads and so on.
The Federal Government must give matching funds, an encouragement to the Province for a greater direct taxation effort at the grass roots level. If the efforts of Sindh Government and its constituent units have generated Rs 16 billion, the Federal Government must make available a similar amount to the Provincial Government. The Development funds made available to the Provincial Government must go down the line on the reverse 50%-25% formula ie. the Province keeps Rs 8.00 billion out of the Rs 16 billion, passes on Rs 8.00 billion to the Divisions which keep Rs 2.00 billion sharing it between themselves depending upon their population percentage and pass on Rs 6.00 billion to the Districts. With 25% withholding at the District level ie. Rs 1.50 billion, Rs 4.50 billion is available to the Sub-Divisional level which withholds 25% (Rs 1.12 billion) and passes on Rs 3.38 billion to be shared between the Local Councils depending upon the population percentage. In Sindh this would mean each Union Council (out of 773) would get Rs 4.5 million or so for development, depending upon the population. Less affluent areas would tend to get more money than wealthier neighbourhoods because of greater population, an effective formula for proportionate sharing could be worked out for poverty stricken areas.
In the first year Punjab should collect Rs 16 billion, Sindh Province Rs 10 billion (mainly because of Karachi), Frontier Rs 5 billion and Balochistan Rs 3 billion (mostly from Sui royalties), a total of Rs 34 billion, Federal matching funds will make the total of the Provincial Budgets Rs 68 billion. The responsibility of the Federal Government would include National highways, airfields, railway lines, telecommunications, etc besides severely underdeveloped and backward areas requiring greater Federal intervention.
The spending of money at each stage must be the sole discretion and authority of the elected representatives. At no stage must any bureaucrat at any level of government have any authority to decide the allocation of or the disbursement of these funds. To ensure that tax is being assessed and collected correctly while money is spent wisely (and not looted at will), the Federal Government should appoint Auditors down to the Divisional level, the Provincial Government should similarly designate Auditors down to the Sub-Divisional level and the Division down to the Local Council level. Their job is to carry out independent information gathering, collation and verification of data, to point out discrepancies to their next immediate superior. Tough fiscal laws must punish malfeasance.
The best (and ONLY) way for the Federal Government to collect direct taxes is to tax credit. Since out of the present collection of Rs 16 billion for Income Taxes, Rs 10.24 billion is from Multi-Nationals and Federal State Enterprises, they should still be kept within the ambit of Federal Income Taxes. Income Taxes for the 500,000 salaried and 500,000 self-employed should be abolished immediately and Credit should be taxed at source by scheduled banks at the time of disbursement. In order to collect a paltry Rs 3.20 billion in the face of total revenues of Rs 120 billion, the Federal Government has no business taxing the unfortunate ONE MILLION paying 2.5% of the tax revenues with 97% of the tax collection effort unless the agriculture class are also taxed. The scheduled banks are advancing credit of Rs 150 billion every year, keeping out the requirement of MNCs and Federal State Enterprises from the amount, by our formula of a 10% withholding tax on credit at time of disbursement and given that most of the balance Rs 110 billion goes to agriculture landlords in various advances (almost all virtually unsecured), the tax on credit at source collected by the Federal Government would come to Rs 11 billion pushing the total figure collected upto Rs 21.24 billion in 1989-90 alone. This figure does not include that tax which would be collected from private business, etc (last year Rs 2.56 billion) making the total Rs 23.80 billion.
When the tax-payer knows that he will have a say in the upkeep and development of his own surroundings through his elected representatives at the grass roots democratic level, we will have positive and purposeful growth in this country. By making the average citizen an interested party in his community’s welfare, we will go somewhere in stabilising our much maligned economy. The principles of taxation should be to (1) decentralize down to the lowest unit level and (2) to maintain a direct linkage between assessment, collection and expenditure.
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