Taxing the taxpayer
It has been extremely disconcerting for the past two months to listen to Finance Minister Ishaq Dar's constant harangues commencing on 5th June, the day the budget was announced in parliament, and continuing to date in all subsequent discussions that the 0.5 percent Income Support Levy (ISL) was a tax dedicated to poverty alleviation. He is on record in one programme claiming that the ISL may be viewed as a portion of the zakat. These claims are counterproductive and at best indicate his lack of understanding of how a tax that he has imposed will be implemented to a deliberate attempt to mislead the general public. A few home truths may be in order.
Copyright Business Recorder, 2013
First and foremost, the ISL is designed to be levied on all those who are required under the law to file their income tax as well as wealth statements to the Federal Board of Revenue (FBR), or in other words, a group that pays tax on its income. This group does not consist of the rich agriculturists who, as per the constitution, do not pay income tax to the federal government and who comprise over 80 percent of all parliamentarians; nor does it include the rich who, in spite of large incomes, remain outside the tax net as they are engaged in the black economy that comprises nearly 50 percent of the legal economy; or indeed those who have fractured their assets which disables the federal government from levying the 0.5 percent tax on their moveable assets.
In short, the major contributors to Dar's ISL would be the already burdened salaried class and his levy would simply render the tax system even more inequitable post-2013-14 budget, than in the past. Dar would do well to acknowledge that one of the major reasons why tax collections have been so poor in this country is the general perception of poor governance that is indicative of not only a large-scale corruption but also of a tax system that is simply inequitable, unfair and anomalous. Pakistanis as a nation make the largest contributions to charities in the world - a fact reflecting the taxpayers' serious concerns over the government's corruption and deliverability of basic utilities.
Secondly and equally importantly, Dar has not formulated a mechanism whereby the tax collected under the ISL would indeed be dedicated to support the vulnerable. Money collected by the government is fungible and there is no mechanism put in place that would ensure that the money collected under this levy would indeed be spent towards poverty alleviation. Dar's record to ensure that a dedicated fund will be used for the purpose intended is rather poor given that while chairing the July 2 Economic Co-ordination Committee meeting he approved transference of a dedicated Universal Service Fund with the objective of promoting the development of telecommunication in underserved and underdeveloped areas to the Federal Consolidated Fund. This enabled him to use the amount collected under the USF for his budget deficit.
Thirdly, the ISL is expected to fuel capital flight given that those who have moveable assets above the taxable threshold have the necessary wherewithal to open accounts in foreign countries. Pakistan's domestic savings rate is already abysmally low that is not able to meet the investment requirements for infrastructure development, both social and physical infrastructure; and hence this latest tax may well increase our reliance on expensive foreign savings to meet our infrastructure needs and last but not least, how will non-Muslims paying this levy treat it as part of their zakat contribution.
Reports indicate that, as expected, the levy has been challenged in the Lahore High Court. It is unfortunate that the Finance Minister, in his overriding desire to reduce the budget deficit through an increase in tax collections, deemed it prudent not to first evaluate the new levy's pros and cons with tax lawyers as well as constitutional experts; and not to heed the argument put forth by analysts that the levy was simply over burdening the lot of existing taxpayers.