Taxes and Dar

Federal Finance Minister Ishaq Dar stated before the Nasreen Jalil chaired Senate Standing Committee on Finance that provinces are not ready to authorise the federal government to impose or collect agriculture income tax. Nasreen Jalil (MQM) is from the only party that during the over one year long debate that succeeded in evolving a consensus leading to the 18th Constitutional Amendment had written a dissenting note with respect to not allowing the federal government to levy a farm income tax. It maybe recalled that Ishaq Dar, also a member of the then Rabbani-led constitutional reforms committee, had opposed the MQM's recommendation.
Be that as it may, Dar's statement to the Standing Committee on Finance is unfortunate for two major reasons. First and foremost, the PML-N has been in government in the Punjab for over six years now has deliberately avoided to levy a farm income tax at the same rate and in the same manner as that levied by the federal government on other sources of income. This indicates the party's preference for political mileage as opposed to the province's economic compulsions. It is unfortunate that the Punjab government opted to impose a flat tax on property in expensive urban areas (a tax that was challenged as many residing in posh localities have inherited the property) rather than to impose a tax on the income of rich landlords - not on inputs, not on output and not on losses as argued by the rich landlords in the country's provincial and federal assemblies but on the net income generated from their productive farm activities. Thus a total collection of 700 million rupees by Punjab from a farm tax last year is appallingly low as rightly stated by Dar as Punjab is widely regarded as the country's bread basket with 56 percent of the country's total population and agriculture accounting for 21 percent of the total Gross Domestic Product (GDP).
Secondly, the reluctance of Punjab to lead the way in farm tax collections is as appalling as Dar's inability to raise revenue generation through reforming the existing flawed taxation system skewed heavily in taxing the already taxed and through heavier reliance on indirect taxes whose incidence on the poor is greater than on the rich. In this context, it is relevant to note that Dar opted to defer a decision painstakingly cobbled together after consultations with the key stock market players by Dr Hafeez Sheikh to increase capital gains tax (CGT) in a phased manner and by 1st July 2014 to levy a CGT of 17.5 percent. Dar, in his budget 2014-15 speech stated that to ensure continued stability in the stock market, it is proposed that with effect from 1st July 2014 rates shall be 12.5 percent for securities held up to 12 months and 10 percent for securities held for a period between 12 and 24 months. In other words, a tax with a capacity to generate 100 billion rupees in one year (with CGT a considerable source of annual government revenue in India and other countries) generated under 2 billion rupees in the current year with the revenue impact of the budget 2014-15 remaining neutral for the next year. This is extremely unfortunate as it fuels speculation that Dar, like Shaukat Aziz, opted not to tax the sector to get the 40-odd key market players to manipulate the stock market in his favour, which he has often cited as an indication of the success of his policies.
In addition, Dar's tax for 2014-15 relies heavily on avoidance of scrutiny by the Federal Board of Revenue (FBR), thereby favouring withholding tax in the form of advance tax on first and business class tickets (at 3 percent), on purchase of immovable property (one percent for compliant and 2 percent for non-compliant) and on electricity bills over one lakh rupees per month (at the rate of 7.5 percent), on car registration, cash withdrawals etc. In other words, attempts to document the parallel economy have fallen, once again, by the wayside which no doubt would concern the International Monetary Fund which had suspended the 2008 Stand-By Arrangement (SBA) for the failure of the then government to implement tax reforms whose major component was to enhance documentation. One would hope that Dar has a plan to enhance documentation which is not contained in the budget documents.
To conclude, one would hope that the Finance Minister would reveal his plans to enhance documentation in months to come and at the same time he would begin to impose taxes on those who can afford to pay (including the stock market players). At the same time one would hope that the provincial governments, particularly Punjab, takes the lead in implementing a farm tax that is comparable to the rate paid by the salaried class who are considerably poorer relative to the absentee landlords who are heavily represented in the nation's provincial and national assemblies.