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February 10, 2016



IPR suggests capital gains tax on property

LAHORE: Former Commerce Minister Humayun Akhtar Khan suggested the government capital gains tax on property, rationalisation of import duties, and to undertake specific measures to enhance tax base by bringing in more individuals and companies in the tax net.

Institute of Policy Reforms (IPR) Chairman Humayun Akhtar Khan, through a report issued on the early revival of the economy, recognises improvements in economic stability under the IMF programme, and also that balance of payments, fiscal deficit, and inflation were under control.

The government should now focus on growth, while ensuring robust stability. Identifying increase in investment as the key to job creation and economic activity, the report proposed a doable growth strategy for immediate implementation.

An expansionary monetary policy would lead the economy out of the morass of the past eight years. The growth strategy centres on three key areas: export increase, industrial revival, and public investment.

Despite stagnant exports, the rupee has remained overvalued. The high value of the rupee comes at a most inopportune time of slowdown in world trade. In fact, this was when many developing countries lowered the value of their currencies. This has placed our exporters at a disadvantage. The report sees the rupee overvalued by about 20 percent.

To revive industry, which too has seen unusual slowdown in recent years, IPR recommends long term project financing at fixed rates. Currently, banks do not have the incentive to do so. At present, they use State Bank of Pakistan (SBP) loans (through OMO) to buy government paper and benefit from the interest rate arbitrage. The SBP could introduce incentives for banks to set up a window for private capital investment. In the past, DFIs performed this function.

This one measure could greatly help industrial revival.

Public investment was the best means to expand jobs and boost growth; however, scarce public investment remained a chronic problem in Pakistan. In addition, the inadequate funds available were often used for prestige projects without the desired economic impact, the report said.

The IPR recommends increase of the public programme to at least five percent of the GDP. Currently, it stands at 3.8 percent. This increase will also provide additional funds needed for the China-Pakistan Economic Corridor. Public spending crowds in private investment, and has a high multiplier effect. An increase of one billion rupees, adds two billion to GDP.

To place stabilisation on a robust plank, the report makes a set of recommendations for control of expenses and increase in revenue.                                  

The report recommends reduction in the number of federal ministries. For functions devolved fully to provinces, it is possible to do away with ministries at the centre. Government may also begin a process of zero-based budgeting. This way it can decide whether to continue with some of the many autonomous organisations that exist.

The government can also rationalise debt-servicing expenditure by locking in the present reduced mark-up for debt. The report recommends a debt portfolio with two thirds invested in PIBs and one third in MTBs.

Loss making PSEs have pre-empted considerable federal resources as subsidies or grants. Government must revisit the way it manages PSEs. It should separate them from the administrative control of their respective ministry. A holding company may be set up to review performance, set targets, and standards, the report suggests.

Perhaps the most important part of the report is its set of recommendations to increase the tax revenue. Government can increase the tax / GDP ratio by four to five percentage points. This is especially possible by improving tax administration and enforcement.

Provinces must play their role in improving revenue. At present, agriculture income tax contributes a paltry one billion rupees in taxes, while the sector has a share of 21 percent in the economy.

Weak performance of provincial boards of revenue has meant a presumptive tax scheme. Tax yield could increase by two percent of GDP by simply indexing assessment to current agriculture prices. Effective penalty for non-compliance would also help. Provinces should increase collection of urban property tax and tax on services.

The report says the federal revenue lost to exemptions and incentives was high. Continued tax holidays for IPPs and under recovery of capital gains on securities alone account for Rs100 billion. Tax deduction allowances amount to another Rs100 Billion.

Government should ensure that these were targeted for the most productive sectors, the IPR report suggests.