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A case for direct taxation.

During the seminars organised by the government it has come out that in the next budget the government plans to broaden the tax base. How the government is to do it, it has yet to be seen. If the past experience is any guide this widening of tax will depend heavily on indirect taxes. In so far as direct taxes are concerned the widening will be cosmetic as. Mr. V.A. Jaffery Advisor Ministry of Finance has only spoken of eliminating of tax exemptions. It is not enough. What is required is to revive all those direct taxes which were abolished by the previous government. The merit in the direct taxation does not lie only in its contribution towards government revenue but also towards income distribution and sharing of the burden of taxation by the rich. The imposition of direct taxes is all the more necessary as during 1980s the burden of taxation has not been on the rich but mainly on low income groups through indirect taxation. It is therefore important to remind the budget makers about a number of direct taxes which were abolished during that period. Estate duty was abolished in 1979; Gift Tax was first reduced and was later done away in 1985-86. Capital Gains tax were also abolished. There were concession in wealth tax from time to time.

The maximum rate of present income tax was lowered from 65 per cent to 45 per cent. The rate of corporation tax was lowered from 52.5 per cent to 40 per cent. Besides the abolition of these taxes there were exemptions and concessions in the income tax itself. The source of National Bond Certificate is beyond the purview of income tax. In addition there is no tax on agriculture income. While no tax was imposed on agricultural income all kinds of tax concessions were granted to the industrial and trading sector. Is is argued by the Federal Government that agricultural income tax comes under the jurisdiction of the provincial government. The provinces do not want to impose agriculture income tax to improve their revenue but continue to depend on the centre to meet their budget deficit. The central government can make it incumbent upon the provincial government that they must meet a certain portion of their budget deficit through agricultural income tax. If the provinces can not do it they should not expect subsidies from the centre.

As for indirect taxes there is a great emphasis on the sales tax. In its effort to widen the indirect taxes the government as we know plans to impose the General Sales Tax. This means that there will be a tax at every stage of production and this will have to be documented. How this is going to be done without effecting the poor remains to be seen. Already, 80 per cent of the government revenue is coming through indirect taxation, a tax system which is "unfair" and "unequitable" to the poor. It hits them most. Specially when inflation is high, unemployment is increasing and the value of the rupee is eroding contributing to further decrease in the real incomes. The ability to pay principle is being ignored by our budget maker as direct taxes account for only 15 per cent of overall government revenue.

We know that the IMF has been pressurising the government for the implementation of the GST. It must however be considered that a GST at this stage will require (a) documentation that the tax payees will have to keep elaborate and time consuming records (b) the number of tax payees would increase posing administrative problems (c) an exemption at any stage under GST will make the government lose its neutrality causing discontent and introduce double taxation as the exempt product re-enters the taxable sector at the next stage (d) transitional problems for example repayment or adjustment for the tax already levied on the stocks of the retailers or wholesalers and (e) the difficulty in the use of differentiated rates especially designed for luxury goods. Hence GST can open avenues for evasion. The fact that the government is already compounded by problems of corruption. The GST will add further to these evils. The GST may bring a lot of revenue but the government must consider these factors.

The share of indirect taxes, non-tax revenue is already heavy. The share of indirect tax during 1988-89 had reached 84 per cent from 81 per cent while that of non tax revenue has reached beyond 39 per cent. On the other hand, the share of direct tax has gone down to 15.6 per cent.

Further tax evasion is rampant and the National Taxation Commission has suggested a number of measures which would help to eliminate tax erasion. These recommendations should not be swept under the carpet. If measures regarding direct taxation and against tax evasion are taken will not only improve revenue but resort to indirect taxation will be reduced considerably. Moreover equity and justice demand that heavy reliance should be placed on direct tax in the next budget. A distributive strategy with the burden of taxation to be shared by the rich will also contribute to the development of a healthy society.
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Author:Huda, Huma
Publication:Economic Review
Date:May 1, 1990
Previous Article:Budget-challenge and response.
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