Post-Election Challenges for Nawaz Sharif

by Huzaima Bukhari & Dr. Ikramul Haq

The real challenges in the post-election period is stemming from the increasing onslaught of miscreants against the State and rapidly deteriorating economic conditions having serious ramifications.

Wanton attacks on almost all political parties with loss of precious human lives confirm that the obscurantists at war with the State are openly committing treason by maintaining private armies prohibited under Article 256 of the Constitution. They are openly demonstrating disloyalty towards the State violating Article 5 which says: “Loyalty to the State is the basic duty of every citizen and obedience to the Constitution and law is the inviolable obligation of every citizen wherever he may be and of every other person for the time being within Pakistan.”

The incidents in Pakistan cannot just be called terrorism—it is much more than that. In fact, this is an open war against the State that needs to be tackled with an iron hand by the new elected government as a first priority or challenge.

Nawaz Sharif’s new government with consensus of all political parties would have to establish special war tribunals to punish miscreants guilty of violating Articles 4 and 256 with impunity.

Article 256 clearly says that “no private organization capable of functioning as a military organization shall be formed, and any such organization shall be illegal.”

Flagrant violation of Article 256 and that of Article 5 needs to be punished without any further delay.

Chapter VI of the Pakistan Penal Code, 1860 mentions inter alia, conspiracies against the State, collection of arms for the purpose of waging war (s. 122), concealing knowledge about such designs (s. 123) condemnation of the creation of the country, (s. 123A) defiling the national flag (s. 123B), assaulting president or the governors with the intention of creating hurdles in the lawful exercise of their powers (s. 124), sedition (s. 124A) and depredation on territories (s. 126)—need to be applied wherever required, adopting due process of law provided in Article 10A of Constitution.

The last Parliament, during its 5-year tenure did not show seriousness in reviewing the existing anti-terrorism laws. However, just a few days before dissolution, it passed two new laws, The Investigation for Fair Trial Act of 2013 and National Counter Terrorism Authority Act, 2013, aimed at collecting evidence and information against terrorist networks using modern techniques. In March and February 2013, the Parliament also passed the Anti-terrorism (Second Amendment) Act, 2013 and Anti-terrorism (Amendment) Act, 2013. It needs to be stressed that mere passing of laws will not help to eradicate the forces that are bent upon undermining the very existence of the State. An all-out effort on a war footing is required to uproot this menace, lest it is too late.

The second most critical challenge is economy. In the post-election period, the country ensnared in debts, needs strict fiscal discipline, proper collection of taxes and their judicious use and above all rapid infrastructure and economic growth and development. The rising fiscal deficit and shortfall in tax revenue has assumed alarming proportions—there has been an increase of Rs. one trillion in domestic debt alone during the current fiscal year. According to the State Bank of Pakistan (SBP), our overall stock of domestic debt comprising permanent debt, floating debt, unfunded debt and foreign currency loan continues to rise—domestic debt registered a massive surge of 15 percent during first nine months (July-March) of the current fiscal year. The stock of domestic debts reached Rs 8.8 trillion mark as on March 31, 2013 as compared to Rs 7.63 trillion as on June 30, 2012, depicting an increase of Rs 1.17 trillion.

Since Pakistan received an amount of $1.8 billion from the US on account of Coalition Support Fund (CSF) so far, it has provided some cushion to reduce reliance on domestic debt resources but even then the government’s borrowing from domestic banking channel has been on the increase. Floating debt, which includes three months’ treasury bills and market treasury bills, is the key borrowing instrument for the government to meet its financial needs and over 50 percent of domestic debt has been borrowed through this instrument. Domestic debt and liabilities are likely to reach Rs. 9 trillion mark at the end of the current fiscal year. Overall floating debts reached Rs. 4.776 trillion mark at the end of March 2013 compared to Rs. 4.143 trillion in June 2012, depicting an increase of Rs. 633.2 billion. In addition, permanent debts, which include market loan, federal government bonds, income tax bonds, prize bonds, etc, rose by 15 percent or Rs. 260.6 billion during July-March of the current fiscal year. With current increase, it surged to Rs. 1.956 trillion from Rs. 1.696 trillion. Similarly, with an increase of Rs. 265 billion, unfunded debts, comprising national savings, postal life insurance and GP Fund, has reached a staggering Rs. 2.063 trillion at the end of the third quarter. Debts under foreign currency loan posted an increase of Rs. 3.1 billion to Rs 4.5 billion. It included FEBCs, FCBCs, DBCs, and special US bonds held by residents. Previously these were part of external debt liabilities but from June 2008 onwards these form part of domestic debt.

If the new government follows in the footsteps of its predecessors, our foreign debt is going to be US$75 billion in 2015 and that of domestic debt Rs. 12 trillion. They will have to take curative measures and tough decisions in the first 90 days along with overall structural reforms. The policy of appeasement towards tax evaders, money launderers and plunderers of national wealth, if not discontinued, will push the country to complete disaster. The shameless indulgence of rulers and bureaucrats in wasteful expenditure has pushed the country towards the position where half of the population of the country is facing malnutrition and one third is living below the poverty line.

The new government will have a formidable challenge on the fiscal front. The Federal Board of Revenue (FBR) is facing huge revenue shortfall. It estimates to collect Rs. 2050 billion by 30 June 2013—the provisional revenue collection stood at Rs. 1516.6 billion till 7 May 2013. The original revenue target of Rs. 2381 billion was revised downward to Rs. 2191 billion in March 2013, but FBR is not even capable of achieving it. In the remaining two months (May & June), FBR is to collect Rs. 489 billion to reach the second-time revised target of Rs. 2050 billion. This, as usual, will be done by collecting advance tax in advance, raising unlawful demands and blocking of bona fide refunds to further harming the business climate and causing hardship to the masses.

The new government can easily collect taxes of Rs. 8 trillion without levying any new taxes and further destroying the ailing economy. Pakistan certainly has 10 million individuals having taxable annual income of Rs 1.5 million (a very conservative estimate), total income tax collection from them at the prevalent tax rates comes to nearly Rs. 3750 billion. If we add income tax due from corporate bodies, other non-individual taxpayers and individuals having income between Rs. 400,000 to Rs. 1,000,000, the gross figure would be about Rs. 5000 billion. FBR collected only Rs. 716 billion as income tax in the last fiscal year. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is only 25-30 percent of actual potential. In fiscal year 2011-12, FBR collected Rs. 804.8 billion under the head sales tax, Rs 122.5 billion under federal excise duty and only Rs. 216.9 billion under custom duties. Total indirect collection of Rs 1148.2 billion was pathetically low. It should have been at least Rs. 3500 billion. If existing tax gap is bridged, the total revenue collection would be Rs. 8500 billion. There is no need to be dejected. We have tremendous potential. All we need is good governance, effective and modern tax administration and prudent use of public money. At the same time, it is necessary to ensure redistribution of income and wealth through progressive taxation—taxing the rich for the benefit of the poor. At present, we are taxing the poor for the benefit of the rich.

The new elected government can end debt-enslavement, which is the main cause of our subjugation provided that as a first step, the President, Prime Minister, ministers, parliamentarians, heads of political parties and high-ranking government officials, start living modestly, pay and collect taxes wherever due and by their behaviour, mobilise the masses for discharging their obligations diligently.

Tax Breaks During the Last Six Months of the PPP Rule

From July to December 2012, the federal government transferred Rs592 billion or 37.8% of the annual commitments made under the 7th National Finance Commission (NFC) Award to provinces whereas it should have been 45%. For the current fiscal year, the federal government is expected to disburse Rs1.45 trillion to the provinces as per their share in tax revenues — the provinces are entitled to 57.5% of the total tax collection, but in the first six months, Punjab received Rs278.6 billion or 39.3% of its share of Rs710.3 billion, Sindh received Rs154.1 billion or 41.2% of its share of Rs373.6 billion, Khyber-Pakhtunkhwa received Rs96.4 billion or 39.9% and Balochistan was given just Rs63.2 billion or 47.4% of its annual share of Rs133.3 billion.

During the PPP rule, the following tax breaks in the last six months affected the collections:

Withdrawal of the biggest new revenue spinner — 1% withholding tax on manufacturing — resulting in a revenue loss of Rs18 billion.

Drastic cut of federal excise duty on sugar to 0.5% aimed at benefiting the influential sugar industry owners, causing a loss of Rs8 billion to the national exchequer.

50% cut of sales tax for steel melters, causing revenue loss of nearly Rs4 billion.

 

The Reckless Borrowing By the Government is Retarding the Economic Growth

Living beyond means

By Huzaima Bukhari & Dr. Ikramul Haq

The State Bank of Pakistan (SBP) on January 22, 2013 reported that public sector borrowing from commercial banks between July 2012 and January 2013 rose to Rs770 billion from Rs627 billion a year ago. In the absence of foreign inflows, the net government borrowing from banks alone amounted to Rs762 billion during July 1, 2012 to January 11, 2013 as against the borrowing of Rs634 billion reported last year. The pace at which fiscal deficit is growing, bank borrowings are going to increase substantially in the coming months. At the end of the current fiscal year, fiscal deficit is estimated to touch 7% to 7.5% of GDP — it means financing requirement of Rs1,624 billion.

This reckless and unabated borrowing by the government from commercial banks is not only retarding growth — depriving private sector of the much-needed funds for investments — but is also forcing SBP to inject heavy amounts of liquidity in the banking system through frequent open market operations, as the high borrowings wipe out liquidity from the money market. The only way to come out of this mess was to enhance tax revenue and control expenses, but the government failed on both the fronts.

During July 1, 2012 to January 11, 2013, the government borrowed Rs594 billion from the banking system for budgetary support and retired Rs168 billion to the SBP. According to latest estimates issued by International Monetary Fund (IMF), “Considering the size and magnitude of Pakistan’s public debt, a high fiscal deficit is inevitable, as the country’s total debt and liabilities have increased to Rs15.1 trillion, or 68.4 per cent of GDP in the first quarter of the current fiscal year, while debt alone stood at Rs14.4 trillion, or 65.3 per cent of GDP during the same period”. The IMF claims that fiscal deficit reached 8.5 per cent of GDP in 2011-12, against the original budget target of 4 per cent, reflecting both revenue and expenditure slippages, including higher subsidies mainly to clear arrears in the power sector — the situation is worsening in the current fiscal year.

While Pakistan is caught in a deadly debt trap, the rulers are not inclined to impose fiscal discipline and the government continues to borrow recklessly from banks to pay off liabilities of the corruption-ridden inefficient public sector enterprises (PSEs). According to the SBP, this has hit economy heavily and resulted in billions of rupees increase in the stock of total debt & liabilities (TDL). Accumulated loss of PIA alone has reached Rs125 billion by the end of 2012.

The government has failed to devise a strategy for raising revenues even to the extent of Rs6 trillion, though actual potential is not less than Rs8.5 trillion [complete roadmap was given in Taxing targets, The News, August 26, 2012 for this collection]. Unless it is done, Pakistan can never come out of the ‘debt prison’.

The Senate was informed on January 23, 2013 that over 3.39 million people have so far been issued National Tax Numbers (NTNs), but only 885,999 filed their income tax returns during the current year. In a written reply, Finance Minister Abdul Hafeez Sheikh admitted that the number of income tax filers had drastically reduced to 1.6 million in 2009 and only 810,000 people filed their returns by the end of this year. The Senate was told that “a large number of businesses and individuals, who were regularly filing their income tax returns, are now avoiding their legal obligations by either under-declaring or incorrectly declaring their assets and incomes”.

The city-wise break-up showed that 665,896 taxpayers filed their returns in Karachi, 270,005 in Rawalpindi, 224,383 in Lahore, 186,136 in Faisalabad, 168,008 in Multan, 145,598 in Peshawar, 75,846 in Gujranwala and 41,085 in Quetta. In the case of large taxpayers, out of 1604 companies registered with three large taxpayers units (LTUs) of the country, 192 avoided filing returns. City-wise, 103 companies in Karachi did not file returns, followed by 58 in LTU Islamabad and 31 in Lahore. The most depressing aspect is that the number of non-filers is increasing. Filing of returns had fallen to 885,999 in 2012 from 1,501,630 in tax year 2011, showing a drastic decline of 40.99 per cent in a single year.

The failure to check widespread tax evasion and enforce tax obligations by the Federal Board of Revenue (FBR) and wasteful spending on monstrous government machinery and inefficient PSEs has pushed Pakistan to the verge of economic collapse. Our foreign debt is going to be US$75 billion in 2015 and domestic debt Rs20 trillion if curative measures and tough decisions are not taken on urgent basis.

The policy of appeasement towards tax evaders, money launderers and plunderers of national wealth, if not discontinued, will push the country to a complete disaster. The word ‘austerity’ is not in the dictionary of politicians in power, high-level civil military bureaucrats and public office holders. The tradition of living beyond means — our national addiction — has turned the nuclear-powered Pakistanis into a nation holding the beggar’s bowl. When foreign lenders see the lifestyle of our ruling elite, they immediately show indignation — it is hard to believe for them that the rulers of a nation struggling on borrowed funds are able to display such flamboyance.

The reluctance to collect taxes from the rich and mighty is worsening the miseries of the poor — there is no scarcity of resources as propagated by the rulers to shift blame on others, but the real cause is outlandish living of the elites off taxpayers’ money. Wasteful spending and unwillingness to harness the real potential by taxing the rich is playing havoc with the economy. Behind the present chaotic socio-economic and political situation in Pakistan, amongst other factors, is an ever widening gulf between the rich and the poor. With every passing day more and more people are being pushed below the poverty line — their total number is now not less than 60 million in a country where rulers unashamedly waste billions of rupees on their personal comfort and security.

Debt burden of 68% of GDP testifies to the bankruptcy of our political leadership and economic managers, who keep on relying on an incompetent and corrupt bureaucracy. As regards technocrats imposed upon Pakistan, they always take the first flight to Washington after creating mess. The policy of appeasement towards tax evaders, money launderers and plunderers of national wealth is showing its impact in all spheres: political culture of rapidly changing loyalties continues, nation is in high despair and all sectors of economy are showing alarming indicators. In this bleak scenario, neither our political leaders nor technocrats dominating the Finance Ministry have definitive plans for resolving these crises.

All said and done, nothing will change unless rulers start living within their means. Unashamedly, they are not ready to surrender extraordinary perks and privileges enjoyed by them at the cost of taxpayers’ money. How can rulers and bureaucrats living in fortified containments, completely oblivious of the ordinary people’s plight, feel the pinch of life’s hardships? In a democratic setup, responsibility towards people who vote for parliament and accountability are interconnected. The concept of a democratic State emerges from the sovereign right of the Parliament to levy taxes but simultaneously the government is required to spend the same for public welfare rather than for personal comfort and self-aggrandizement. This second part of democracy is completely missing in Pakistan.

We cannot come out of debt-enslavement unless we tax each according to his ability and giving each according to his work, as enshrined in Article 3 of the Constitution. For this, the starting point should be a complete change in the style of governance — the president, prime minister, ministers, parliamentarians, heads of political parties and high-ranking government officials have to live at the average man’s level. Palatial official residences should be sold or converted into income-yielding assets, and all perquisites of public servants and office-holders be monetized to remove the burden off our country’s broken financial back.

 

Rupee is Going to Fall Further Due to Repayments to the IMF

by Huzaima Bukhari & Dr. Ikramul Haq

The government, at the fag end of its tenure, has reportedly invited International Monetary Fund (IMF) for negotiating a three-year bailout programme. It is a rather surprising move, especially its timing. Analysts are of the view that after bringing the economy to the brink of collapse, this regime lacks legal or moral authority to negotiate a long-term agreement with the IMF.

They argue that prudence requires that they should have left the matter to the new government having a fresh mandate for the next five years. One view is that lingering and deepening economic crisis, especially bourgeoning fiscal deficit, has alarmed the IMF – it has bona fide worries about the capacity of Pakistan to repay its huge loan if present political lot continues to rule. The forces that matter are even trying to engineer desirable political changes so that bankruptcy is averted. The IMF with enormous stake in Pakistan has been highly critical of FBR’s performance, in particular, fixing what it calls ‘ambitious targets’, and then missing the same with wide margin. After failure to meet the target of Rs 1952 billion during the last fiscal year – a shortfall of Rs 71 billion was admitted by FBR – fixation of target at Rs 2381 billion was simply irrational, said IMF’s review mission after last year’s detailed discussions with Pakistani officials to assess Pakistan’s ability to pay back remaining debt of approximately $6.4 billion.

According to latest estimates of IMF, since FBR would not be able to achieve the revenue target of Rs 2381 billion fixed at the time of budget for fiscal year 2012-13, consequently budget deficit target of 4.7 percent would not be achieved. The IMF has reportedly conveyed to FBR that it would even miss the downward revised revenue target of Rs 2231 billion (it has yet not made public) during 2012-13.

In these circumstances, the decision to go back to IMF for another Stand-by Arrangement (SBA) facility is obviously a compulsion as our foreign exchange reserves are dwindling and expected to remain under pressure due to repayments of IMF loan in the next more than 36 months.

Despite an adverse economic situation, Pakistan paid US $1.2 billion to the IMF during fiscal year 2011-12 from foreign currency reserves held by the State Bank of Pakistan (SBP). According to the repayment schedule agreed between Pakistan and IMF, Pakistan will repay $7.6 billion to the IMF until the end of the fiscal year 2014-15. The $11.3 billion SBA program expired on September 30, 2011, and the last two tranches of $3.7 billion could not be paid to Pakistan by the IMF following Islamabad’s failure to pursue key reforms as well as the exposure of fiasco of revenue figures. Pakistan had entered into an $11.3 billion program in 2008 with the IMF and got disbursements of about $7.6 billion, but failed to get the remaining $3.7 billion due to slippages in performance criteria, leading to suspension of the program in May 2010, which was ended unsuccessfully on September 30, 2011.

It is high time that FBR, instead of announcing any new amnesty scheme, improve its enforcement capacity through Tax Intelligence system to detect tax losses. Capping budget deficit at 4.5% cannot be possible without substantial resource mobilisation and drastic cuts in non-productive expenses coupled with rapid industrial growth that will ultimately improve tax-to-GDP ratio.

The real dilemma of FBR is that mighty segments of society do not pay personal income tax, courtesy permanent amnesty scheme available in the Income Tax Ordinance, 2001 in the form of section 111(4). Those who do not whiten their black money through “fake” remittances periodically avail loathsome amnesty schemes to decriminalise their untaxed wealth and incomes by just paying 1%-2%, which amounts to sneering at honest taxpayers. One wonders if the IMF will take note of it or ignore it again as it did in the past.

People in Pakistan ask why they should file tax returns when their president, prime minister, ministers, governors and elected representatives do not do so.

Tax culture in Pakistan will never take roots unless tax and asset declarations of all the mighty segments of society – politicians, high-ranking military and civilian officials, judges and all public office holders – are made public. There should be a public campaign that the absentee landlords, most of whom are members of parliaments, should reveal their tax declarations. All the judges, high-ranking public servants, including serving and retired generals, should also be required under the law to make public their assets and tax declarations on annual basis. Any person, who is a tax delinquent or has been beneficiary of any loan write-off, should be debarred from contesting elections. All kinds of exemptions and concessions provided under various tax codes should be withdrawn.

The tendency to squeeze more and more from the existing taxpayers and giving a free hand to non-filers has eroded the tax system to an extent where voluntary compliance and tax enforcement have lost their relevance. The present tax system imposes greater and undue incidence on the poor and middle-class people (e.g. 16% GST takes larger portion of low-income groups compared to high income groups). The rich and mighty are not paying agricultural income tax and income tax on their non-agricultural income. Most of them are landowners-cum-industrialists-cum-politicians and are engaged in massive tax evasion – case of cartelization and tax bonanza in sugar industry is a classic example. Adding insult to injury, the tax collected from the citizens is wasted on unprecedented privileges and perquisites meant for the elites – indomitable military complex, civil bureaucracy, higher judiciary, landed aristocracy and its cronies, industrialist-turned politicians, religious and spiritual leaders (sic) and unscrupulous businessmen.

We can raise tax-to-GDP ratio to 20% if we tax absentee landlords, speculative dealers in real estate (this would also help in promoting construction industry as prices of land come down) and introduce asset-seizure legislation for untaxed assets and incomes. It is the need of the hour that FBR should be insulated from all kinds of political, financial and administrative pressures. At the same time, it should not assume the role of legislature and policymaker which, under the Constitution is the sole prerogative of people of Pakistan through their elected representatives.

How the Government Supports the Non-Tax Payees

Official documents presented before the Federal Cabinet on November 14, 2012 says that “a significant segment of Pakistan’s economy is undocumented. The growing size of the underground economy is not only depriving the exchequer of its due share but also acting as a hindrance to economic planning and development.

A large number of business and individuals who are regularly filing their Income Tax returns are avoiding their legal obligations by either under-declaring or not correctly declaring their assets and/or income.

On the other hand, a large number of businesses and individuals who are required to be registered with the FBR and to regularly file their Income Tax returns are avoiding their legal obligations.

The FBR along with NADRA has data about the multiple bank accounts, travel, assets and other details of these non-filers. Based on this data two tax incentive schemes are being proposed by FBR.

The past attempts by FBR to register them failed as the FBR field units unfortunately compromised the data.

Tax Registration Enforcement Initiative, 2012, has been devised to attempt, through a simple scheme to be administered through banks along with NADRA under proposed section 120B of Income Tax Ordinance 2001, to register and bring into tax net non-filers of tax returns.

A fixed tax is proposed and provides cover to undeclared income/assets up to Rs 5 million.

Investment Tax Scheme, 2012 is being proposed to be enacted under the authority given in section 120A of Income Tax Ordinance 2001, which will attempt, through a simple scheme, to provide a mechanism and cover to registered filers in addition to non-filers of income tax returns to declare undeclared income assets/expenditure up to the value of Rs 5 million by payment of token tax and additional assets/income by payment of investments tax as per proposed slab.

The scheme will be administered through establishing special counters with the help of banks along with NADRA. Both the schemes may not be taken as a safety net for those who have not complied with tax laws but as a trampoline which will provide buoyancy to the national economy and deepen and broaden the tax base.

The persons availing the schemes shall also have immunity under the National Accountability Bureau Ordinance 1999, Federal Investigation Agency Act, 1974, Compliance Ordinance 1984 and Foreign Exchange Ordinance 2002.

Up to five per cent of tax revenue through the schemes is proposed for expenditure on the publicity and advertisement for the launch of the schemes, in accordance with prescribed procedure of PID and the Federal Government and 1.5 per cent of the revenue receipts from the Tax Registration Scheme is proposed as share of the NADRA.

The Common Man in Pakistan Has No Buying Power

Hedrick Smith, a former correspondent and Washington bureau chief of the New York Times, and the author of “Who Stole the American Dream?” in a recent article has said that the Americans have forgotten the wisdom of Henry Ford. In 1914, not long after the Ford Motor Company came out with the Model T, Ford made the startling announcement that he would pay his workers the unheard-of wage of $5 a day.

Not only was it a matter of social justice, Ford wrote, but paying high wages was also smart business. When wages are low, uncertainty dogs the marketplace and growth is weak. But when pay is high and steady, Ford asserted, business is more secure because workers earn enough to become good customers. They can afford to buy Model Ts.

This is not to suggest that Ford single-handedly created the American middle class. But he was one of the first business leaders to articulate what economists call “the virtuous circle of growth”: well-paid workers generating consumer demand that in turn promotes business expansion and hiring. Other executives bought his logic.

Riding the dynamics of the virtuous circle, America enjoyed its best period of sustained growth in the decades after World War II, from 1945 to 1973, even though income tax rates were far higher than today. It created not only unprecedented middle-class prosperity but also far greater economic equality than today.

The chief executives of the long postwar boom believed that business success and workers’ well-being ran in tandem.

The job of management,” he wrote, “is to maintain an equitable and working balance among the claims of the various directly affected interest groups,” which he defined as “stockholders, employees, customers and the public at large.”

Earl S. Willis at General Electric declared that “the employee who can plan his economic future with reasonable certainty is an employer’s most productive asset.”

From 1948 to 1973, the productivity of all nonfarm workers nearly doubled, as did average hourly compensation.

But things changed dramatically starting in the late 1970s. Although productivity increased by 80.1 percent from 1973 to 2011, average wages rose only 4.2 percent and hourly compensation (wages plus benefits) rose only 10 percent over that time.

At the same time, corporate profits were booming.

In 2006, the year before the Great Recession began, corporate profits garnered the largest share of national income since 1942, while the share going to wages and salaries sank to the lowest level since 1929. In the recession’s aftermath, corporate profits have bounced back while middle-class incomes have stagnated.

Today the prevailing cut-to-the-bone business ethos means that a company like Caterpillar demands a wage freeze and lower health benefits from its workers, while posting record profits.

Globalization, including the rise of Asia, and technological innovation can’t explain all or even most of today’s gaping inequality; if they did, we would see in other advanced economies the same hyperconcentration of wealth and the same stagnation of middle-class wages as in the United States. But we don’t.

In Germany, still a manufacturing and export powerhouse, average hourly pay has risen five times faster since 1985 than in the United States. The secret of Germany’s success, says Klaus Kleinfeld, who ran the German electrical giant Siemens before taking over the American aluminum company Alcoa in 2008, is “the social contract: the willingness of business, labor and political leaders to put aside some of their differences and make agreements in the national interests.”

In short, German leaders have practiced stakeholder capitalism and followed the century-old wisdom of Henry Ford, while American business and political leaders have dismantled the dynamics of the “virtuous circle” in pursuit of downsizing, offshoring and short-term profit and big dividends for their investors.

Today, we are all paying the price for this shift. As Ford recognized, if average Americans do not have secure jobs with steady and rising pay, the economy will be sluggish. Since the early 1990s, we have been mired three times in “jobless recoveries.” It’s time for America’s business elites to step beyond political rhetoric about protecting wealthy “job creators” and grasp Ford’s insight: Give the middle class a better share of the nation’s economic gains, and the economy will grow faster. Our history shows that.

When one applies all of the above logic to the economic situation in Pakistan, one realizes that our governments and the industrialist class is constantly making the same mistake since independence. They believe in sheer exploitation.

The wages are extremely low and the working class is poorest of the poor. While the capitalists despite innumerable difficulties and infrastructural problems live luxurious lives and still manage to make enough profit to continue expanding their businesses, sending their children for higher education to the West, go each quarter on an expensive holiday and comfortably spend thousands of rupees each day eating out.

The middle class is small and the elite is even smaller. Consequently, the consumer market is small. If we desire Pakistan’s economy to flourish, then the buying power of the common must be increased. And we need to exploitation to achieve this…

Deputy Chairman Planning Commission

Do you know that the current Deputy Chairman of Pakistan’s Planning Commission is a “US University” trained and “IMF” groomed economist.

No wonder miracles are happening.

This Economist in-charge of the Planning Commission who had previously worked in PIDE (Pakistan Institute of Development Economics) does not believe in any role of government other than considered traditional!

Given this revelation, ain’t you surprised that we are experiencing only ten years of continued power outages, double digit inflation, lower DFI, unemployment and underemployment, and a continued stagnant economy.

 

Pakistan is Controlled and Ruled by the Elites

by Dr Ikramul Haq

Pakistan is controlled and ruled by ashrafiya (elites)—comprising indomitable military complex, civil bureaucracy, higher judiciary, landed aristocracy and its cronies, industrialist-turned politicians, religious and spiritual leaders (sic), media tycoons and some of their powerful employees, and unscrupulous businessmen.

Flouting the rule of law with shameless impunity is the hallmark of present day’s Pakistani ashrafiya.

The spoiled brats of ashrafiya join different nefarious circles for all kinds of unlawful and undesirable activities—for them vulgar ostentation of money and power is essential to prove that they are closely associated with the most powerful of the State. In good old days, ashrafiya was respected as a class of nobles and highly revered. In post-colonial Pakistan, the term represents the money-power-hungry classes posing as if the country is their personal jagir (property) and all their acts are above law.

The economy of ashrafiya-controlled-Pakistan, thus, serves the interests of the privileged classes.

The ruling classes, representing only 2% of entire population, own 95% of national resources.

They exploit labour of landless tillers, poor urban workers and white-coloured to amass more and more wealth.

Additionally, they create artificial hike in prices of essential items to snatch back whatever little is earned or saved by 98% ordinary people.

The evolution of this kind of State (land of the Pure) is elaborated in detail by former Governor of State Bank, Dr. Ishrat Hussain, in his book Pakistan: Economy of an Elitist State.

In his book, Dr. Ishrat has observed that in sharp contrast to the East Asian model of ‘shared growth’, based on rapid economic development coupled with a rapid reduction in poverty and more equitable distribution of the benefits of development in Pakistan, the elitist model confers political and economic powers to a small coterie of elite (parasites). While commenting upon Dr. Ishrat’s work, Dr. Khalil Ahmad of Alternate Solutions Institute, in his recent book, Pakistan Main Riasti Ashrafiya ka Urooj (Rise of State Elitism in Pakistan), published in February 2012, has also concluded that Pakistan is presently owned and exploited by  ‘state elites’ whereas it should belong to all.

There are no two opinions that the ruling trio—mighty military complex and its civilian cronies, corrupt politicians and unscrupulous businessmen—imposes its will on members of parliament in all matters. The entire budget making process is an epitome of apathy of parliamentarians towards the masses of this country, who vote them into power with the hope that they would do something for their socio-economic uplifting or at least provide them basic essential services—housing, transport, education and health, to say the least.

Democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation which is only possible if the Parliament performs its Constitutional role, implements flawless process of accountability and ensures good governance. Theoretically, the Cabinet is answerable to the Parliament! But the stark reality is that MNAs merely run after ministers for personal favours and gains.

Reliance on indirect taxes that constitute 75% of total collection proves beyond any doubt that the tax system is emphatically contributing to rising poverty as people who earn enormous income and possess immense wealth are not being subjected to income taxation in Pakistan. Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated and nullified. Not only that Pakistan has one of the lowest tax-to-GDP ratios in the world, the burden of taxes is overwhelming borne by the poor rather than by the rich. Income inequalities are one of the worst aspect of the entire problem. In South Asia, except Afghanistan, all other countries have better tax-to-GDP ratio than Pakistan: India 17%, Sri Lanka 16%, and Nepal 11%.  It is pertinent to mention that in 2011, the government of Sweden collected taxes at 53% of GDP, almost twice as high as the total tax revenue of America and Japan, with both collecting around 25% of GDP. In the Euro area, tax revenue, on average, reaches 40% of GDP.

The present tax policies of the government are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The ability-to-pay principle is regarded as the most equitable and just method of taxation and emphasized upon primarily for its redistributive role. In Pakistan, our rulers have completely deviated from this principle, which is in fact, a constitutional obligation of the government. The existing tax system protects the establishment and exploitative elements that have complete monopoly over economic resources. There is no political will to tax the privileged classes.  Pakistan has been facing a variety of crises specifically in areas of: resources for its developmental policies, meeting trade deficits, fiscal deficits and balance of payments, in addition to numerous others. One of the factors responsible for the present situation is the accelerating speed with which black money is being generated.

FBR is directly responsible for this phenomenon as its mafia-like operations has helped the people to avoid tax on incomes by paying it “due share”. Through the infamous system of SROs [Statutory Regulator Orders], FBR’s top officials provide “legal” ways and means to mighty sections of the society (ashrafiya) to amass huge wealth that is now threatening the State’s very survival.  It is worth mentioning that even before presenting the Finance Bill, 2012, FBR issued notification 569(I)/2012 on  26 May 2012 saying that government officials in Grade 20-22 will pay just 5% tax on monetized transport allowance. This benefit of reduced rate taxation, blatantly bypassing the Parliament, portrays how bureaucrats hoodwink the nation and cause exchequer loss of revenue through SROs. Needless to say it is discriminatory and violative of Article 25 of the Constitution as private sectors employees for the same allowance are subjected to normal rate of taxation.

Reduction of duties for cartels possessing enormous money has been extended by using executive authority in the form of SROs. Pakistan is a unique country where the executive authority can conveniently undo laws made by the Parliament under so-called delegated powers which gross violation of Article 162 of the Constitution of Pakistan, which reads as under:

“162.   Prior sanction of President required to Bills affecting taxation in which Provinces are interested: – No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression “agricultural income” as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President.”

Article 162 debars even the National Assembly to grant exemptions without the prior approval of the President but interestingly, this power has been delegated unconstitutionally to an executive authority by the Parliament. How can Parliament delegate a power which it cannot exercise itself without the prior sanction of the President?

By delegating powers under tax codes, the Legislature has violated Article 162 of the Constitution.

The common man is subjected to exorbitant sales tax and federal excise duty of 16% (tax incidence is 35% on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities [even salt sold under brand names is subjected to 16% sales tax] but the mighty sections of society such as generals, high-raking bureaucrats, judges getting plots from the State are  not paying any wealth tax/income tax on their colossal assets/incomes. The same is the case with big industrialists and landed classes that get concessions and exemption through SROs.

It is tragic that in a country where billions of rupees are being made in speculative transactions at stock exchanges and in the real estate sector, tax-to-GDP ratio is one of the lowest in the world [consistently below 10% for the last 10 years] and the government is least bothered to tax undocumented economy and benami (name-lender) transactions rather, generously give amnesties to tax evaders and looters of national wealth. The mighty sections of society are widely engaged in these transactions while rulers of the day, getting due share from them, are not at all inclined to tax them. The present tax policies of government are violative of Constitutional provisions that require the State to provide social justice to all.

The existing tax system protects the ashrafiya and exploitative elements that have monopoly over economic resources—those who own 95% of national resources are paying less than 2% of overall tax collection. This shows why there is no political will to tax the privileged classes.  Unfair taxation and inequitable distribution of resources is the root cause of our multiple socio-economic ills. State policies induce massive tax evasion (section 111(4) of the Income Tax Ordinance, 2001 is a permanent tool for whitening of untaxed money).

Determination of a tax base capable of measuring an individual’s ability-to-pay is a major problem of our tax system.  This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax worldwide. In Pakistan we have moved from this positive policy to unequal sacrificial rule where the mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning State lands as meritorious awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes whereas the poor people are compelled to pay sales tax and federal excise duty of 16%. The incidence of regressive taxes on the poor is making their lives a misery beyond imagination.

Pakistan has about 118.5 million mobile users who pay both income tax and sales tax but even then only 1.3 million taxpayers file income tax returns—if statements filed for presumptive taxes are excluded, the actual number is below 750,000. Majority of mobile users may not have taxable income (Rs 350,000, raised to 400,000 from tax year 2013) yet they are burdened with undue liability. On the contrary, many rich people just pay a fraction of income tax (withheld at source) on their actual taxable incomes without bothering to file their income tax returns—in Pakistan less than 250,000 non-salaried return filers admitted that their annual income was more than Rs. one million!

If out of total population of 180 million, we have 10 million individuals having taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection from them at the current rate for tax year 2012 should have been Rs 3750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 100,000, the gross figure would be nearly Rs 5000 billion. FBR collected only Rs 560 billion as income tax plus Rs. 20 billion as other direct taxes during fiscal year 2010-11 and figure for this year would be around Rs 665 billion. This shows a whopping tax gap of over 600 percent. Similarly, in sales tax, federal excise and custom duties, due to rampant corruption, the total collection is only 20% of actual potential. In fiscal year 2010-11, FBR collected Rs 633.4 billion under the head sales tax, Rs 137.4 billion under federal excise duty and Rs. 180.8 billion under custom duties. Total indirect collection of Rs 951.6 billion was pathetically low. It should have been at least Rs 3500 billion.

If tax gap is bridged, the total revenue collection of Pakistan would be Rs 8500 billion (Rs 5000 billion direct taxes and Rs 3500 billion indirect taxes) which would change the entire fiscal scene.

We would have enough money for current expenditure, development and public welfare outlays— government would retire debts in just a few years and we can easily become a self-reliant nation free from political subjugation.

However, this dream for Pakistan can never be realized unless the mighty sections of society (ashrafiya) are taxed according to their ability to pay.

Tax policy must be used as tool for rapid industrialization and creation of job opportunities.

It is imperative to tax the unproductive sectors to divert money to productive sectors and ensure redistributive charter of tax system—taxing the rich for the benefit of the poor.

At present, we are taxing the poor for the benefit of the rich. This trend must be reversed before it is too late.

The Government is not leaving any opportunity to screw the masses. Bizarrely, while the price of crude oil is falling in the international market, petroleum prices are on a constant rigmarole in Pakistan which is leaving the common man stripped of his earnings, increasing inflation to a non-receding position, and rendering the lives of the poor vulnerable. It goes without saying that this whole exercise is bringing in huge profits to the petroleum companies and revenues in trillions for the government (per Rana Bhagwandas Commission Report on Petroleum Prices dated July 9, 2009 submitted to Supreme Court of Pakistan).

It is incontrovertible fact that the main beneficiaries of price rises are a few oil companies and the FBR which in its latest report, has admitted that “the petroleum is the leading contributor of sales tax domestic collection. The overall collection of sales tax domestic depends on the collection of petroleum products as it contributes around 43pc of the sales tax domestic. The growth is mainly attributable to increased taxable sales of petroleum products by 37.6pc”.

This is the story of “exceptional growth” in revenue collection of FBR, about which Premier Gilani and his American national economic adviser Abdul Hafeez Shaikh are proud of. They seem to be least concerned if this move pushes millions of Pakistanis below the poverty line, destroys the economy and creates unrest in the society. The share of government taxes and levies in petroleum prices is more than 50pc from the stage of importation to final ex-refinery supply point.

Taxes constitute a major part of the price of every petroleum product — consumed by the public for personal and business purposes.

During the fiscal year 2010-2011, FBR collected total sales tax of Rs633 billion out of which share of POL products alone was Rs263.821 billion (on import Rs110.54 billion and on domestic supply Rs153.28 billion). The figure for July 2011 to December 2011 of the current fiscal year is Rs148.9 billion.

In the report submitted to Supreme Court by Rana Bhagwandas Commission dated July 10, 2009, it was revealed that from 2002 to 2009, the government made Rs10.23 trillion in taxes on petroleum products.

It is regrettable that we have failed to provide mass transit facility for at least 2 large cities — Karachi and Lahore — and bus service for every city and town despite burdening citizens with all kinds of taxes. On the contrary, consumer loans were vastly disbursed under Musharraf-Shaukat era, inducing purchase of vehicles resulting in enormous profits both for the petroleum companies and car manufacturers.

The real sufferer is the common man who cannot afford personal transport. More and more cars on the roads cause pollution, traffic mayhem and are the main source of increase in our oil import bill.

From July 2011 to February 2012, our crude oil imports surged to US$ 3.85 billion, compared with US$ 2.49 billion in the corresponding period of the preceding year.

In order to cut the import bill, we need improve public transport system that can solve all the prevalent problems. The challenge before us is to build good public transport system and a clean energy economy.

Today, we export billions of dollars each year to import the energy we need to power our country with. Our dependence on foreign oil threatens our national security, our environment and our economy. We must make investments in clean energy sources that will create millions of new jobs and lay the foundation for long-term economic security.

Our rulers follow United States in most of the matters, where their personal interests are involved, but not in areas where public welfare can be achieved. In recent months, the US made great strides toward changing energy future. The US Recovery Act constituted an unprecedented and historic investment in the clean energy economy. Our government must realise that investments in the development of renewable energy and clean technologies can lead to energy sources of the future.

We have destroyed our rail system — depriving the poor and business houses of cheap and efficient transportation mode — while other countries are making huge investments in high speed rail and advanced car batteries, considered as transportation systems of the future.

It is sad that the government is using higher taxes on petroleum products as means to reduce its fiscal deficit, without realising that price hikes in these items affect economy as a whole, retard growth in all sectors besides accelerating inflation.

Our tax system benefits the wealthy at the expense of the overwhelming majority of poor Pakistanis. The government, instead of restoring equity in the tax system — reducing corporate tax rates and increase taxes on the rich — is using price-hike in petroleum products as a means to collect more taxes, thus extending extraordinary benefits to a few powerful oil companies and making life of 95 percent of the people miserable. By plugging loopholes that prevent wealthy companies and individuals from paying a fair share of taxes, the government can generate enough revenues through levy of excess profit tax to build public transport system that would save billions that we mercilessly spend on import of crude oil.

Not a Single Political Party Supports Land Reforms in Pakistan

In recent years, we have suffered from the implementation of new policies and of a new development model based on land expansion and land expropriation, commonly known as land grabbing. Land grabbing is a global phenomenon led by local, national and transnational elites and investors, with the participation of governments and local authorities, in order to control the world’s most precious resources. Land grabbing has resulted in the concentration of the ownership of land and natural resources in the hands of large-scale investors, plantation owners, logging, hydro-power and mining companies, tourism and real estate developers, port and infrastructures authorities. This has led to the eviction and displacement of the local populations – usually farmers, the violation of human rights and women rights, increased poverty, social fracture and environmental pollution. Land grabbing is a global phenomenon based on the corporate domination of agriculture through control over land, water, seeds and other resources. It is justified by many governments and policy think tanks through claims that agribusiness will modernize backward agricultural practices and guarantee food security for all. The key players behind land grabbing prioritize profit over people’s well-being: they produce agro-fuels if this is more profitable than food production, and they export their food production if this is more lucrative than selling it at home. In this race to profit, the corporate sector is increasing its control over food production systems, monopolizing resources, and dominating decision making processes. Business lobbies have strong political influence that often overrides democratic institutions; in addition, they act with the complicity of local and national elites (traders, politicians and community leaders) who fail to protect their own people from predation. Land grabbing is a new trend in Asia, Africa and Latin America in which large tracts of land are being bought or leased by overseas companies. Corporate sector is using this land to grow food, fiber and agro-fuels. Pakistan has also announced a lucrative investment policy which is encouraging corporate sector to engage large tracts of land in all 4 provinces of Pakistan on very easy terms. Pakistan’s new corporate agriculture farming is against food security. Free hand is given by the government to corporate agri-farming poses serious threat to the livelihood of peasants. It will give a golden opportunity to big land lords to avoid land reforms by making nexus with corporate sector by selling or leasing their lands and getting rid of tenant farmers. It is a myth that corporate agri-farming is highly productive. Overall it proves costly due to high costs of farm inputs and also it degrades soil and agro-ecology by using genetically modified crops and expensive pesticides and fertilizers. Sindh has the highest incidence of absolute landlessness, with 26 % or two million households not having any land, while 80% of tenants are landless. Majority of the rural people have agriculture as major source of livelihoods in Sindh. It employs 13.46 million people having 7.74 million as rural and 5.72 urban workforce. But for the majority, working arrangements in agriculture wage work, tenant farming, share cropping are either exploitative or yield little earnings. He said an open letter is being sent to political parties and other stakeholders to mobilize them to include land reforms top on their agenda. New ways of economic exploitation is taking place in new world order. He said corporate farming does not bring prosperity to local population of farmers in our agriculture society. Punjab and India are ahead in food production because of small farms, which are owned by farmers, as compared to large farms owned by absentee land lords. This shows that land reforms have proven successful and small farm are more successful that large ones in terms of per acre yield and supporting poor families for food dependence. About two-fifth of the labour force in Pakistan is engaged in agriculture, which contributes to one-tenth of the GDP. Land in Pakistan is not merely an economic commodity in Pakistan; it is also a source of social and political power. Agricultural land ownership in the country is highly concentrated and unequal. Around half of the rural households do not own any land, and the top 5 % own over a 1/3 of all cultivated area. Rural women spend more hours in agriculture labour than men but they earn less income compared to men and face more hardships to own agricultural land. Inequality of land ownership and landlessness is a major cause of poverty and backwardness in Pakistan. The large farms have approached the maximum yield per acre with the available technology. Further growth in agricultural output increasingly depends on raising the yield per acre of smaller farms. The small-farm sector, whose yield potential remains to be fully utilized, constitutes a substantial part of the agrarian economy. In Pakistan small farms (less than 25 acres) constitute 88% of the total number of farms, and 57 % of total farm area. The 54 % of the total farm area in the small-farm sector is tenant-operated. Since tenants lose half of any increase in output to the landlord, they lack the incentive to invest in technology, which would raise yields. Because of their weak financial and social position they also lack the ability to make such investment. Tenants’ ability to invest is further eroded by a nexus of social and economic dependence on the landlord, which deprives the tenant of much of his investable surplus. Thus the objective of raising yields in the small-farm sector is dependent on removal of the institutional constraints to growth arising out of the fact of tenancy. Corporate farming policy of Government of Pakistan is against the economic and food security interests of the nation. Corporate farming will displace farm labors and small scale farmers, particularly women and further marginalize them from their livelihoods. Land reform programme that gives land to the tiller is an essential step in providing the small farmer with both the incentive and the ability to raise his/her yields. Land reforms are required not only to accelerate agricultural growth, but to prevent the developing social crisis associated with the poverty and disempowerment of peasantry in Pakistan’s rural society. Land reforms in Pakistan are an unfinished agenda. The country has experienced 3 attempts of land reforms in 1959, 1972 and 1977.  Unfortunately in 1977, during the land reforms debate, a military dictator General Zia-ul-Haq toppled the civilian government and during Zia era a Shariat bench of Supreme Court of Pakistan upheld an appeal to declare land reforms against the law of Shariat. Land reforms play an important role in agriculture production, poverty eradication and empowering the poor farmers. In Pakistan, the power of landed aristocracy has acted as a barrier to social and economic progress of the rural society. Genuine land reform can help solve the problems caused by the fact that farmers often use relatively inefficient capital-intensive techniques due to distorted market prices and that small farmers do not have access to the liberal credit subsidies on imported machinery and capital equipment. It is about time that all political parties and stakeholders support new land and agrarian reforms in Pakistan. All major political parties must clearly express their commitment about a land reforms programme in Pakistan. All political parties should include an equitable, effective land and agrarian reforms in their election manifestos. A comprehensive land and agrarian reforms programme should be introduced in Pakistan with immediate effect which is based on pro-poor, pro-peasant, equity and gender justice principles. The verdict of Shariat Bench of Supreme Court, during Gen. Ziaul Haq’s rule which declared land reforms against Islamic principles, should be revoked with immediate effect. Landless women should be given priority in land re-distribution programmes and all discriminatory legal and cultural practices that prevent women’s right to own agricultural land and be recognized as a farmer should be declared illegal. Women should be recognized as Farmers not just as farm workers. Land ownership ceiling be fixed at 50 acres irrigated and 100 acres non-irrigated land per family. The necessary legislation should be introduced in favour of land reforms. The land recovered from large land owners should be redistributed among the peasant landless farmers, who have been working on that land with proper legal titles. The Existing tenancy acts should be reformed to allow workers to establish unions, demand fair wages and receive land titles supporting their legal rights to the land; while legal mechanisms should be put in place to adjudicate complaints and resolve conflicts. Bonded agriculture labour and keeping peasants in private jails should be declared a heinous crime which should be sentenced with maximum punishment to those who commit it. All laws and regulations regarding land developed under colonial era that is anti small farmer, should be abandoned and a judicial commission on land utilization should be formed to check exceeding commercialization of land. The landless farmer families should be allotted at least 10 acres of agricultural land and the land titles should be in the name of both husband and wife. The agriculture land occupied by or allotted to military farms and government departments should be revoked and redistributed among the local landless peasants. Corporate farming should not be promoted under the current policy framework. There must be a new legal framework which must ensure food security, abiding of labour laws and a ceiling limit over land. The land reserved for corporate farming should be distributed among landless farmers. Utilization of groundwater should be brought under a regulatory law to ensure equity and protection of  underground water resources. Allotment of forest land to the influential persons has to be revoked and re-allotted to the peasants on the condition of re-forestation. The occupied surveyed or un-surveyed lands in the country must be re-surveyed and distributed among the landless peasants and agriculture workers families. Equitable distribution of the water at the tail-end is imperative. To avoid water logging and salinity, the canals, branches and watercourses should be lined. The government must draw up an agriculture policy with the consultation of agriculture scientists, peasants, agriculture workers and growers. The parliament should be persuaded to pass a legislation for protection of the peasant’s rights, allowing them to have their trade unions, ensuring social justice and providing them the old age benefits to men and women farmers of Pakistan. The new Food Security and Research Ministry must focus on the land related issues as on of their priority area of work.

 

Pakistanis Should Get Prepared to Pay More Taxes

Tax rates proposed for the next budget will increase the burden on low-income salaried people by more than six times.

The salaried people with annual taxable income of less than Rs400,000 but more than Rs350,000 will pay income tax at the proposed rate of 10 per cent instead of the present 1.50 per cent. Monthly salary of Rs33,000 falls in this category.

The tax burden will increase by more than four times for the salaried people whose annual taxable income is more than Rs400,000 but less than Rs450,000. They will pay taxes at the proposed rate of 10 per cent instead of the current 2.50 per cent. People getting a maximum monthly salary of Rs38,000 fall in this bracket.

Currently, there are seven tax slabs for the assessment of income — minimum tax bracket at 1.50 per cent and maximum at nine per cent.

These slabs apply to minimum annual income of Rs350,000 and maximum of Rs1,050,000. The number of salaried people falling in this category stands at 316,000 — 80 per cent of the total taxpayers registered with the income tax department.

This means that changes in the income tax slabs will severely hit the low-income people who are already facing the brunt of inflation. It has been proposed to reduce the number of existing seven slabs to one. The seven slabs were worked out with the principle of reducing the taxation impact on the low-income salaried people.

Further analysis of the proposals shows that the tax burden impact will be three times greater for those people whose annual taxable income is less than Rs550,000 but more than Rs450,000, and more than two times for people whose income exceeds Rs550,000 but remains less than Rs650,000. The existing tax slabs for these brackets are 3.50 per cent and 4.50 per cent, respectively.

Other tax slabs proposed to be abolished are six per cent, 7.50 per cent and nine per cent on taxable income exceeding Rs650,000 but less than Rs1,050,000 per annum. A rate of 10 per cent has been proposed for these slabs.

At the same time, the government has decided to reduce the number of tax slabs for the salaried class from 16 to only six. However, it has also been proposed to increase the rate of income tax for the upper salaried people from 20 per cent to 35 per cent. Three new tax rates — 25 per cent, 30 per cent and 35 per cent — have been proposed for them.

The government is also considering introducing a new tax slab of 15 per cent on the taxable income exceeding Rs1 million but remaining less than Rs2 million. The slab will be 20 per cent for people whose annual taxable income is between Rs2 million and Rs3 million.

A new rate of 25 per cent has been proposed those people whose taxable income exceeds Rs3 million but remains less than Rs5 million. Those taxpayers whose income stands between Rs5 million and Rs10 million will now be paying income tax at 30 per cent from next year. A tax rate of 35 per cent will apply to people whose taxable income exceeds Rs10 million.

For individual taxpayers, the government has proposed a new tax slab of 15 per cent on annual taxable income between Rs350,000 and Rs500,000; 20 per cent on income between Rs500,000 and Rs750,000; 25 per cent on income between Rs750,000 and Rs1 million; 30 per cent on income between Rs1 million and Rs10 million; and 35 per cent on income of more than Rs10 million.

Almost all these slabs will apply to the association of persons.