Flood tax plan swayed by foreign examples

IDPs not in a position to pay sales tax on goods, let alone tax on property and income.

KARACHI: The government’s plan to impose a flood tax on taxpayers, which would contribute to rehabilitation efforts, finds its roots in plans hatched in different disaster-hit countries.

Several states in the US have a history of imposing flood or earthquake-specific taxes, such as in California, which sees frequent earthquakes. Turkey, on the other hand, imposed an earthquake tax after the devastating 1999 earthquake which killed 18,000 people. India imposed a two per cent cess tax on all central taxes for relief efforts after the Gujarat earthquake in 2001.

A flood tax was imposed in Johnstown in the US state of Pennsylvania, which was hit by a flood in 1936. The ten per cent tax was to pay for flood rehabilitation since the damage to property was valued at $41 million. However, the tax was only imposed on the sale of alcohol; and has not been repealed as yet.

However, in countries such as Haiti, where a devastating earthquake in January 2010 killed over 300,000 and caused damages and losses worth $8 billion, the taxation system was also just as badly affected. The International Monetary Fund (IMF) planned to help the government of Haiti in its objective of “improving the equity of the tax system by rationalising exemptions and broadening the tax base”.

Haiti’s tax revenues were also further hit by the fact that the administration system to collect tax was severely affected by the earthquake, a problem that has been seen in Pakistan.

As reported by The Express Tribune on September 1, the target for tax collection for August was not met because of the floods. According to the report, “the authorities managed to collect Rs87 billion in August against a target of Rs102.4 billion”.

Extensive damages to infrastructure in flood-hit areas, as well as the loss of property and business ensure that flood victims – millions of whom are displaced – are not even in a position to pay sales tax on consumption goods, let alone taxes on property and income.

A number of proposals were floated in the United Kingdom to impose a flood tax. One of them was that the government would continue to provide funding for flood defence and a levy would be charged on people whose homes are at risk from flooding.

In Turkey, taxes imposed in 1999 generated $45 billion for the country. The Turkish government announced a series of measures after the disaster, including deferral of tax payments for businesses and individuals in the earthquake-hit areas. Taxes imposed included “a one-off tax on personal and corporate tax; real estate tax and motor vehicle tax paid in 1999; a special transactions tax; a special tax on each paper cheque; an increase in the remittances of surpluses generated by regulatory boards; a 25 per cent increase in the tax on mobile telephone usage for 2000, and an increase in petroleum products consumption tax”. However, the move to impose new taxes was met with protests from the country’s business community and opposition parties.

BBC quoted former Turkish Prime Minister Tansu Ciller saying at the time that the government should “first wait for the results of the voluntary aid campaign that has already been launched. The new tax can only harm that campaign”.

In an email interview with The Express Tribune, the chief economist at ING Bank Turkey, Sengul Dagdeviren said that while there was occasional criticism about the effective utilisation of the revenue earned through the taxes, there was “no major reaction to the taxes in the business community due to the severity of the disaster”.

In terms of the efficacy of the measures, Dagdeviren said, “The Turkish government needs to raise revenues while getting support from outside too. Looking at the pace of recovery in 2000 and the optimism created around the stabilisation programme supported by the IMF, we can’t say that taxes were a bad policy choice for Turkey at that time, as the taxes were not a lasting drag on the economy.”

Closer to home, the tsunami-hit countries in 2004 adopted a series of measures to cope with the humanitarian disaster. While Sri Lanka waived import duties for the first four months after the tsunami, it re-imposed import duties, including duty on relief goods, when the reconstruction phase began. In Indonesia, income tax was reduced for those donating to relief efforts.

As an alternative to imposing taxes in disaster-hit areas, Dagdaviren says while the policies would depend on what cycle the country is in at the time of the disaster, “the cost has to be paid either by debt or more local savings”.

Published in The Express Tribune, October 7^th, 2010.