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Direct tax ratio retained at 32 per cent

KARACHI, June 7: The next year's budget announced on Saturday, retains by and large, the same ratio of direct taxes at 32 per cent and those of indirect taxes to 68 per cent in the overall tax collection as was in the current fiscal ending June 30 next.

Direct tax collection constituted 35.1 per cent of the total in 1997-98 and 35.7 per cent of total federal tax receipts in 1998-99 during the much maligned political government of exiled Prime Minister Nawaz Sharif.

Before 1997-98, the ratio of direct tax to the total federal tax collection showed a steady growth from 25.2 per cent in 1993- 94 to 27.2 per cent in 1994-95 and to 29.2 per cent in 1995-96. During all these years, the elected PPP government led by Benazir Bhutto, also in exile at present, framed the economic policies.

Direct taxes are the fiscal tools for governments to enforce social justice and enforce a system of equitable distribution of resources. The spirit is to tax more on those who earn more income and transfer resources to the less fortunate sections of the population.

A fall in ratio of direct taxes in the overall federal tax receipts during the current fiscal and also in the coming fiscal conveys loudly the priorities set by the present government. Revenue generation is the only objective, no matter from where it comes. By enlarging the scope of indirect taxes, from 64 per cent in 1997-98 and 1998-99 to 68 per cent at present, the government is pushing more and more people down the poverty line.

In 2002-03 the budget proposed total tax collection at Rs460 billion. The finance minister is confident of achieving this target. This include Rs148 billion tax on income and Rs313 billion indirect taxes that include sales tax, excise and customs.

Now the government is all set to collect Rs510 billion taxes in the year 2003-04. It shows an increase of Rs50 billion. Rs161 billion will come from direct tax payers and Rs349 billion from all sections of the population. There will be additional tax generation of Rs39 billion, bulk of which would come from sales tax.

From direct taxes the government plans to generate Rs13 billion more in the next fiscal year. The finance minister announced withdrawal of 20 exemptions. No details are available of these exemptions. The question is whether the government has withdrawn a very limited exemption from tax given to the retired persons on the National Saving Scheme. This is a question which the finance minister will probably answer on Sunday.

A Committee of experts constituted by the present government to revise Income Tax Policy and Law about three years ago had identified 64 exemptions given in the income tax law and has recommended their withdrawals.

Headed by a retired civil servant Saeed Ahmad Qureshi the Committee also held detailed discussion with an IMF team that visited Pakistan in September 2000.

The IMF team suggested withdrawal of presumptive and withholding taxes. The IMF team offered a paper “Guidelines for Fundamental Reforms” containing extensive recommendations. The committee's report can be considered to have been framed within these guidelines and had proposed gradual withdrawal of the presumptive and withholding taxes.

The committee found withholding and presumptive constituting the bulk of direct taxes. To what extent the government has complied with this IMF conditionality is something that Finance Minister has not bothered to speak on.

An attractive tax credit of Rs500,000 has been proposed for the investors of construction industry. Saeed Qureshi's report has categorically proposed the abolition of tax credits except for the tax credit available under section 107A of the repealed income tax law. This provision also stands repealed and there is no explanation whether the new income tax law provides such concession.

“Tax credits usually erode the tax base and are against the principle of equity” was the consensus argument which the Committee has heard during its interview with 250 persons. Under the previous system tax credit concession was available for purchase of medical books, commutation of provident fund, allowances for investment in defence certificates and NIT units. Most of the allowances were found redundant and the committee came out with a firm recommendation of “abolition of all credits and deductions”.

Not only the crippling taxes in the current and next year's budgets, the surcharge levies on oil and gas are expected to have far exceeded 2002-03 budget target. The document shows that revised estimate collection of surcharge levies on oil and gas at about Rs67 billion as against a projection of Rs60.5 billion. The government has conservatively projected the collection of these levies at Rs61 billion

These surcharge levies have an all round impact on a common man. It increases production cost, push up transport charges and virtually affect all activities of the life. This levy is a main revenue tool for a government that considers poverty alleviation a challenge.

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