ISLAMABAD: Finance Minister Asad Umar on Tuesday hinted at withdrawing tax exemptions being availed by the elite and also announced a drastic reduction in the number of withholding taxes from the next budget including the tax on banking transactions being paid by non-filers of tax returns.
The minister expressed these views at the launching ceremony of a book, ‘Growth and Inequality in Pakistan – Agenda for Reforms’. The book has been written by Dr Hafiz A Pasha whom Umar described as Pakistan’s number one economist. Friedrich Ebert Stiftung – a German institute – has financed the book under the theme of ‘Economy of Tomorrow’.
The book discusses almost every important aspect of Pakistan’s economy and carries a detailed chapter on elite capture of the state.
The finance minister said the government was reviewing tax exemptions being availed by the elite aimed at withdrawing them. He, however, added that all these tax exemptions were not being availed by the rich as some were benefitting the public at large.
The single biggest privilege was tax concessions for the elite that had been estimated at Rs400 billion only on account of income tax exemptions, said Pasha.
The finance minister said the withholding tax on banking transactions would also be abolished. Former finance minister Ishaq Dar had imposed 0.6% tax on banking transactions being carried out by the non-filers.
Umar said this tax was causing more damage to the economy than the Rs30 billion annual benefit that the Federal Board of Revenue (FBR) got.
Pasha had suggested withdrawing majority of the withholding taxes as these were not contributing to the income tax collection. Umar said the government had the intention to withdraw at least half of the 41 types of withholding taxes that were not contributing significantly to the revenues.
Umar also endorsed the proposals of introducing the wealth tax and capital gains tax on real estate. The finance minister said the residual wealth beyond a certain threshold should also be taxed.
The book also talked about breaking the grip of the elite on the economy that had created inequality in society. In recent years, allocation of land for residential and commercial development in large cities has become a primary source of large capital gains, reads the Growth and Inequality in Pakistan.
The government should have courage to look at all the tax concessions that were costing the kitty Rs850 billion annually. Pasha said there was no rationale for giving sales tax exemptions to canteens being operated by the army. The 23-year income tax holiday given to Chinese companies operating under the China-Pakistan Economic Corridor (CPEC) should be withdrawn.
He also asked the government to review the free trade agreement with China that, according to him, had put the country in a disadvantageous position.
“The central issue for Pakistan’s economy is the state capture by the elite,” said the finance minister. “I also feel the heat of the elite capture due to the onslaught launched by the civil-military bureaucracy against a particular decision.”
Last month, a World Bank report identified four influential groups – the civil servants, landowners, industrialists and security services – that had captured Pakistan’s economy. According to Pasha, there are at least seven categories. These are large landowners, defence establishment, multinational companies, commercial banks, urban real estate developers, parliamentarians and others.
The feudal class is enjoying extremely low income tax, pays very low water charges and enjoys subsidies, according to the book. One per cent of landlords still held 22% of land and 50% of total farmers owned only 11% of land, said Pasha.
Multinational companies are enjoying a protective wall of import tariffs.
Pasha also warned about the dangers of stagflation, urging the government to address the issue on priority.
Over the past five years, the inflation had remained low and the economic growth was high – an equation that “has now reversed”, said Sartaj Aziz, former deputy chairman of the Planning Commission.
Aziz said the government’s decision to massively cut development spending, increase interest rate and prices of utilities and currency depreciation had increased the prospects of stagflation.
“It is not a good economic picture for presenting the budget,” said Aziz. He advised the government to maintain last year’s economic growth momentum – a suggestion that Umar did not accept.
Aziz said the slowing economic growth rate would be disastrous due to high population growth and resultant increase in unemployment and poverty.
Published in The Express Tribune, April 3rd, 2019.