Fostering Regional Hubs Budget

The global environment is undergoing rapid changes; in particular following the macro-economic control and reforms of state enterprises, the government has embarked reforms of its capital markets by giving a 1% reduction in tax rate for new enlistment. While setting out strategies to cope with the ongoing global challenges and a sustained growth of Pakistani economy depends largely on the extent to which it meets the competitive pressure emerged globally.

People believe that Pakistan's competitive edge lies in its financial services sector, given the development of infrastructure and rigorous regulatory framework. These are the sector that we should further strengthen to complement the development and to stand out from other countries, in particular our neighbors.

Under the theme of "Fostering Pakistan's position as Regional Hub as an international financial and business centre", my submission recommends fiscal measures that are critical to Pakistan's sustained position as a major capital market in the region, a fund raising platform for regional companies, and a premier location for regional headquarters or offices of multinational companies. My recommendations underpin the essential characteristics of an international financial and business centre, which include an effective legal system, transparency, certainty and consistency in policies, a low tax regime, a favorable tax environment, low transaction costs, a pool of talents and professionals, and an environment that facilitates quality life.

Continuing with our robust recovery in 2004 - 2005, the growth momentum of Pakistan's economy was further strengthened in 2005 - 2006 except with the law and order situation and some mishaps in relation to foreign investors after the political, economical, social, legal, environmental and technological analysis [PESTEL]. Pakistan continues to benefit from the strong economic growth with comparative base set years ago and the package of policy measures initiated by the current Government which are based on hypothetical analysis and detailed economic analysis has already been published in newspapers.

Statistics and surveys reveal an encouraging outlook. Pakistan's economy should grow by 6.5 to 7.0 percent in the fiscal year ending June 1 this year as per Governor SBP with inflation level of around 8% which is not possible without a tight monetary policy. Although such surveys are normally subjective and the first example is the GDP of Pakistan which was calculated on the basis of 1980-81 figures but suddenly the year 1999-2000 has been declared as base year. This sudden change has shown a tremendous improvement in GDP by 19.5% as compared to old base year.

The property market (especially the luxury end of the market) has continued to pick up; however, there are no measures to curb the speculative forces. Our stock market has done better over the past year and index gained around 54% during the last year. The rise in property and asset prices is broadly in line with better economic prospects.

With a robust property and stock market, the fiscal pressure is expected to be greatly relieved, however, there is a dire need to define the economic fundamentals in a policy statement which would make this growth sustainable and must include ways of controlling inflation in order to achieve maximum stability in prices instead of putting the windfall gains like 9/11 and allies in the war on terrorism in the kitty.

It is suggested that there must be an amendment in the constitution to compel the governments to formulate a strategic budget for their term at the beginning of the life of a parliament. However, minor changes on any annual basis during the course of parliament needs to be allowed for correction as major changes introduced regularly create uncertainty.

It is further suggested that Government needs to be bounded to present the budget information in a financial statement. Such financial statement may include macro economic assumptions [including estimates of aggregate growth, inflation and exchange rate], fiscal deficit, deficit financing [describing anticipated composition], Debt stock [including details at least for the beginning of the current year], Financial assets [including details at least for the beginning of the current year], Prior year budget out-turn [presented in the same format as the budget proposal], Current year Budget [either the revised budget or the estimated out-turn, [presented in the same format as the budget proposal], summarized budget data for both revenue and expenditure according to the main heads classification including data from current and previous year, explanation of budget implication of new policy initiatives with estimates of the budget of all major revenue policy change or some major changes in expenditure programs.

Government must ensure that a similar sort of statement is about to be obligatory by international forums are working over such area and recently International Public Sector Accounting Standard Board has issued Exposure Draft 27 - Presentation of Budget information in financial statement. It is said to say that Pakistan Institute of Public Finance Accountants [PIPFA] is far behind in incorporating such changes and developing itself as the helping hand of the public sector after replacing the SAS body. Government should encourage PIPFA to offer public sector qualification on the model of CIPFA of UK and must devise a qualification in line with the pronouncement of IPSASB in order to fill the gap of SAS.

While the near-term outlook is positive, challenges remain. The current favourable business sentiment hence provides a good opportunity for the government to formulate a blueprint of fiscal policies in order to foster robust and sustainable growth over the medium and longer term.

A blueprint is needed to incorporate the provision for transformation of existing legal system into an effective legal system, make Pakistan a low tax regime coupled with favourable tax environment, low transaction cost, provision for talents and professionals and creating an environment that facilitates qualitative life.  However, our major challenges remain unemployment, severe competition, tax uncertainties, increased public expenditure, budget deficit and enlarging gap between rich and poor. In furtherance, there is a growing demand of increasing provision of health care, social welfare and education. However, a structural budget deficit continues to deplete our fiscal reserve and threatens Pakistan's international credit rating.

There must be a theme of the budget. However, the budget must focus on the following aspects.

1.      Concentration over existing Industries

2.      Change of Oil and Gas Exploration Regime - from Royalty to Capital Cost Extraction

3.      Concentration over unexplored resources on BOT basis

4.      Strategy for Tourism Industry

5.      Strengthening Pakistan's position as regional Hub

6.      Inflation control and stability in prices policy

7.      Effective regulatory environment

8.      Favourable Tax Environment with low transaction cost

A sustained growth of Pakistan's economy over the medium and longer term will depend largely on the extent to which it meets the challenges of maintaining its position as a regional hub and business centre. This theme must address our current needs without compromising the ability of our future generations to meet their own needs. However, the word sustainable has three important aspects, that is, economic, environmental and social dimensions to achieve a sustainable development of our country - Pakistan. Global and domestic environment is changing. Our success in the future will depend upon the appropriate strategic steps now taken to address our current issues and lay down a solid foundation for future.

However, in the past, the economics of Pakistan has been riddled in vicious cycle and is self adjusting for decades. This vicious cycle starts from utilization of excess liquidity by the rich, firstly, with higher bank deposit in times of higher interest rates, secondly, investing in stock exchanges, thirdly, investment in properties and finally in storage of basic necessities items like flour, sugar etc coupled with stoppage in supplies to the market, hence, this vicious cycle kept on going for years. However, this time the vicious cycle has affected the economy of Pakistan in a most unusual way owing to the excessive liquidity, as compared to the past and things moved in a more destined direction owing to consistent policy except political decisions.

ESSENCE OF REGIONAL HUB

In order to become the ultimate choice of multinational companies, Pakistan's financial infrastructure needs to be sustainable and for this very purpose we need a stringent supervisory and regulatory system. Other pre-requisites include an effective legal system, transparency, certainty and consistency in government policies including interpretation of laws, lowering of tax rates and favourable tax environment, low transaction cost, pool of talented professionals and an environment that facilitates qualitative life.

Rules and regulation contributes to be ranked as one of the top problems for business today and in World Bank survey our ranking is much below as compared to regional averages. There must be a comprehensive programme of measures to address regulation which should include the commitment to significantly improve the impressions of our regulation and requires continuous assessment. We must harmonize our laws as currently there is a book available in the market which contains just the names of our laws.

A favourable tax environment provides appropriate tax incentives for businesses, transparent and predictable assessment of tax liabilities, and simple tax administration. It also includes measures to facilitate cross border economic activities. These are essential features in attracting multinational companies and foreign investors to establish businesses in Pakistan.

Currently, tax incentives for regional headquarters are provided by many jurisdictions including Singapore, Malaysia, the Philippines as well as China. For instance, in order to attract more regional headquarters to establish in the Pudong area of Shanghai, generous subsidies will be offered to new regional headquarters in the coming five years. The subsidies are calculated with reference to the local revenue retained by the Pudong government in respect of the Enterprise Income Tax, Business Tax and Individual Income Tax paid by these newly set up regional headquarters.

To further strengthen Pakistan's edge in attracting foreign investors to establish regional headquarters or holding companies, I reiterate my proposal to provide concessionary tax rates (e.g. half rate) for regional headquarters' activities which are of a substantial scale and are of the nature of investment, general management, financial management, and marketing with a broad geographic coverage.

Hong Kong has recently introduced the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 to reinforce the status of Hong Kong as an international financial centre. However, the proposed legislation of Hong Kong was only meant for the benefits of overseas investors. In Singapore, tax incentives are also given to encourage fund managers' set-up. To promote the setting up of service centres in Pakistan to manage overseas funds, I propose that concessionary tax rates, e.g. half rate as currently enjoyed by offshore reinsurance business, be given to those approved fund managers who manage overseas funds in Pakistan.

FISCAL SUGGESTIONS

Government must give incentive to build Pakistan as a regional Hub. In furtherance, it is high time that government should replace federal and provincial sales tax with Goods and Services Tax. This constitutional hitch needs to be removed once for all. The increased mobility of capital and personnel apart from increased integration of our economy with SAARC countries gave rise to the concern of adaptability of our tax regime with the changing environment. The fiscal suggestions are as follows.

Companies' Ordinance reform

At the very outset, the regulators must see whether the new piece of legislation is based on voluntary compliance or legally binding approach. The focus of company law initiative must be on the protection of stakeholders apart from redressing the balance in favour of promoting business activity. However, one cannot compromise over the essential nature of the company law - concept of limited liability.

There is a dire need to strengthen corporate governance arrangements at legislative level instead of listing regulation level apart from the preparation of best practice guidance which needs to be incorporated into legislation. Guidance should, in particular, encourage listed companies to disclose more information on their policies and practices with regard to risk.  

In the context of the objective of promoting business activity, SECP should aim to ensure that each company is free to conduct its activities, in its home province or in other provinces, in the manner that its directors consider is in the best interests of the company and its stakeholders. This should be followed up by provisions to ensure that company information published under the terms of the company law and is fully and easily available to searchers from anywhere in the world through website. There should also be minimum rules governing shareholder rights and moves to harmonise insolvency procedures and creditor rights.

The new legislation must strengthen the rights of auditors to obtain information on their client companies' affairs. This will extend the auditor's current statutory right to demand information from a company's directors to all the company's employees. Further, directors who fail to volunteer information to their company's auditor when they know that the information concerned is material to the audit will be subject to criminal penalties. By presenting directors with the prospect of jail if they wilfully mislead auditors, the new legislation should emphasise to directors of all companies the importance of full and transparent disclosure of information.

In furtherance, any research would reveal the fact that resignation statements are uncommon and even when such statements are made they tend to be relatively uninformative and unhelpful to the members and creditors of the company whom they are intend to assist. A copy of resignation statement needs to be sent to appropriate authority like ACCA, ICAP or ICMAP. Where the auditors appointment being terminated concerns a listed company or where there is a major public interest in the company's financial condition, the concerned need to pass this information no sooner it receives on the ceasing to hold office. A significant amendment is required in this area on the basis of which the court should judge the auditor's conduct when filing a resignation statement. The courts must consider the fact that whether the auditor is abusing the rights conferred to auditor.

The key reason why resignation statements have either not been filed or have contained limited information is largely due to the concerns that auditors have had about being drawn into potential lengthy and expensive litigation with their formal client. This is exactly what happened in Jarvis Plc & Ors Vs Price water House Coopers [2000]. The company applied to court to prevent PWC filing its resignation statement with the registrar. The proceedings took a considerable time to resolve and by the time the proceedings had been resolved, the resignation statement was out of date. Whilst the application to court was being made, the content of resignation statement was prevented from coming to the attention of members and creditors at the appropriate time.

Any provision regarding auditors' resignation needs to persuade the auditor to prepare and file informative resignation statement rather than encourage them. The provision must consider the concept that whether the auditor is using the statement to secure needless publicity for defamatory matter. The test must be based on auditor's motive and the threshold needs to be placed at a relatively high level. In such Judiciary matters, not only the company show the material in the statement is defamatory but it must also prove bad faith on the part of the auditor. Serious consideration should be given as to how the procedure for dealing with these applications can be improved so that the wheels of justice turn a bit quicker.

The term accountant is not defined and protected by law. This enables anyone to set him or herself up as an accountant without professional training. Normally people assume that when they deal with accountants they assume they are qualified. In case, the new companies law contain the provision that all companies are required to file its accounts then Securities and Exchange Commission of Pakistan would have ample records of many inaccurate and poor quality sets of accounts produced by unqualified accountants like the CBR.

As we know that companies are ultimately liable for the accuracy of their final accounts and it is the companies that are subject to fines. Poorly prepared accounts leave independent shareholders and creditors at risk and can make fraud harder to detect. The gulf between qualified and unqualified accountants is widening day by day as all professionally qualified accountants are now obliged to undertake continuing professional development [CPD].

Government must realize the fact that individuals must be able to state that they are tax advisors or book-keepers, but, in the way that the term advocate means a client will have the services of a qualified advocate. The term accountant should denote the services are provided by a fully qualified accountant. This is high time that currently there are four bodies running five different qualifications. ACCA itself and its accounting technician scheme of CAT, ICAP, ICMAP and PIPFA.

SECP should require public and large private companies to prepare an Operating & Financial Review (OFR). This new document will require companies to report to their members on the key issues which have affected their past performance and the factors which are likely to affect their future prospects. The OFR is also a great step forward for the cause of 'inclusive' company reporting because it will provide a statutory platform for companies to report on how they have accommodated the concerns and interests of the wider group of stakeholders who are interested in their activities.

There must be an onus on company directors to include, in their OFRs, information which is relevant to a broadly based understanding of their companies' performances and prospects, for instance, social and environmental issues which are of great concern to other stakeholders and country regulators. These might also include issues such as child labour, bribery and corruption or localised environmental damage. There are also wider issues such as climate change and carbon risk which need to be addressed by many large companies.

However, issuance of SRO's and adoption of Accounting standard need a close review and I think that SECP should consider the use of alternative mechanisms, other than circulars, directives and regulations, in future company law-related initiatives. SRO's in particular takes too long to approve and implement and are not always suitable for highly technical measures. I think that SECP in a new Action Plan on Better Regulation, where appropriate, should regulate by means of industry standards and best practice guidance. Any delegation of authority in these matters will, however, need to be subject to governmental scrutiny and backed up by remedial powers.   

The associated provisions need to be grouped together as far as possible. In furtherance, any decision regarding two separate statutory requirements for smaller companies and larger companies is a welcomed approach because company law must provide scope for small companies to grow and thereby become subject to the rules applicable to larger companies not merely a 1% reduction in tax rate.

The veil of incorporation is here to stay and should only be lifted in the most exceptional circumstances. It may be relatively easy to say with clarity when the veil should be lifted in those instances where statute allows. However, where there are no statutory guidelines the courts are becoming increasingly reluctant to do so. I think that the new company law must contain some statutory guidelines in respect of lifting of corporate veil.

Currently, one of the issues which businesses and practitioners find particularly difficult to cope with at the moment is that so many piecemeal changes have been made to the CO1984 over the past 20 years that it now lacks coherence. The company law rewrite will offer the opportunity for new legislation to be drafted afresh which is more accessible to small companies and which is sufficiently flexible to adapt to changing business conditions.

Direct Tax Law

Given the new economic development and advanced business environment, there is a need to review several charging provisions and interpretations in our tax law to ensure that they are not outdated and are adaptable to the rapidly changing business environment.

The concept of resident and non-resident is of no use without the co-operation of different revenue agencies around the globe. However, such co-operation is of no use where the companies or individuals are resident in off-shore centres, tax heavens or by whatever name called.

In furtherance, there are only a few examples of cases reported on account of effective place of management. CBR should eliminate this concept of resident and non-resident in order to increase the capital inflow. The difference between tax rates between residents and non-residents is almost absent; hence, there is no hitch in eliminating the concept of resident and non-resident. However, this needs to be coupled with stringent requirement of wealth statement for Pakistani nationals with no fear of result for transparent reporting regarding wealth outside.  

The Income Tax Ordinance, 2001 does not contain the concept of controlled financial companies [CFC]. CBR must be equitable in this regard and should not jump over conclusion. It must also analyse the fact that if relocating loses to higher tax countries also constituted avoidance and could be legitimately restricted. Normally, the CFC's objective is to prevent the transfer of profits to lower tax jurisdictions. However, the most interesting point is to identify whether the taxpayer's conduct is artificial and what constitutes artificial tax planning.

Taxing capital gains would discourage the people from overseas to invest as this contravenes our policy of attracting investment. However, law must balance between taking the windfall profit and investing for long term by the foreign investor. In furtherance, the local salaried class which is the backbone of Pakistan's economy should be allowed to take tax credit of books, personal training and children education.

Tax laws draw the line between what is within the law and what is outside it. It is unhelpful for businesses, individuals and tax practitioners alike to hear the term unacceptable tax avoidance. Tax avoidance by definition is legal, tax evasion is illegal. There should be clarity on the CBR's position and certainty in the legislation.

Some retrospective amendments and their reversal have given very bad signals to the market. There is a need for clear, considered and consistent business friendly messages to be projected by the Government and retrospective legislation should not be on the agenda in any area of taxation.  

Disputes and uncertainties arise in tax assessment with increasing sophistication of economic activities; In addition, facing the rapidly changing economic environment, there are more and more sophisticated financial products and financial arrangements. The increase in litigation and fame of FTO office should be a challenge for CBR and may serve as a benchmark ascertaining its performance instead of satisfying over the reduced corruption level.

The volume and complexity of tax legislation has been increasing yearly and amendments like adoption all related circulars / SRO's relating to section 50 of Income Tax Ordinance, 1979 making again the new law a complicated document. Continuous amendments in assessment section of Income Tax Ordinance, 2001 is indicating that it is marching back to 1979. There seems to be little or no attempt from the Government to keep the new law simple and quite to the contrary, the successive budgets and subsequent finance bills seem to be pulling the tax system along the path to greater complexity and member direct taxes must realize the fact that mere chanting the slogan of simplicity is not suffice but it require some home working.

Any tax change should be driven by a tax policy committee [TPC]. Governments would set the overall economic framework of the tax environment and the TPC would work on adjusting the tax system as appropriate with a view to long term simplification. The TPC should be comprised of both private and public sector representatives apart from tax practitioners.  

The self assessment system in Pakistan is largely sanction driven. CBR may adopt the Australian model where there is a far more liberal regime for income tax deductible expenses, resulting in early filing and early tax repayments. CBR may have other alternatives which include modifying the existing tax system to create incentives for complying with deadlines, like Australia, or the current system should be revamped for allowing early filers a shorter inquiry window etc.

In a dynamic business environment, it can sometimes become inappropriate for a business entity to remain as a company. Given that incorporating can occur without tax cost, it is unfair to levy a tax penalty on companies which decide to pursue a different structure. More flexibility here would help to boost entrepreneurship.

SME's believes the 100% initial depreciation allowance for investment by Small to Medium Sized Enterprises (SMEs) in information and communications technology should be introduced immediately to improve our competitiveness with India.

I believe that the tax rates needs to be brought down to the level of 20% after doing a careful gap analysis of sectors which are contributing much less or low tax like leasing owing to initial depreciation, although the initial depreciation is allowed for manufacturing concerns, insurance where there is no appropriate tax system for calculation of taxable profits apart from free limit for various exempt reserves. The promise of 35% tax rates indicated by the CBR chairman for all corporate entities would mean that we will miss the boat when the tax rates in the emerging economies are in the band of 10 to 20%.

While competitiveness lies in a wide range of factors, such as technology, entrepreneurship, finance, logistics, and education, tax is a significant element as it is part of the overall cost in doing business. Since the US and the UK led the way in reducing taxes, lowering direct tax rates has been an observed global trend and attracting foreign investments. Global and regional tax competition put our traditional strength as a low tax jurisdiction subject to an increasing challenge. Government should understand the fact that people will oppose on keeping the direct taxes rate at the same level as a means to resolve budget deficit.

Businesses incorporate new companies due to various commercial reasons, such as limitation of liabilities, or holding of accountability on operational activities, etc. As such, many local as well as overseas investors establish separate operating companies under one or more holding companies. These group companies are effectively arms or divisions of a central unit.

To achieve an equitable tax basis, I reiterate our proposal to introduce group loss relief with it true merit, not merely subsidiaries of limited companies holding 75% shares with various conditions, in our tax system that losses of one company can offset the taxable profits of another company within the same group. Group loss relief has been adopted in a number of countries, including Singapore and Japan.

Taxing group companies as a single entity by way of group loss relief can provide flexibility to investors to venture into new activities through separated business vehicles (the separation allows segregation of business risks and enables a higher degree of accountability by different teams of management taking care of activities of relevant business vehicles) and yet enable segmented business results be consolidated, not only for accounting purposes but also for tax filing purposes.

I reiterate my recommendation that tax loss of a business be allowed to be carried back to set off against the assessable profits in the preceding year. Further, if loss carried back is allowed, this will encourage a business enterprise to reinvest its profits in new plant and equipment as the depreciation allowances thereon may produce a tax loss in the year of investment and the carry-back of such loss will provide an incentive in the form of tax refund for the preceding year.

As a matter of principle, I consider that "tax assessment" should not be driven entirely by "accounting treatment" when clearly a tax based on the accounting treatment has produced undue tax hardship and when the gain being taxed is no more than a sum created by accounting entries. This principle needs to be incorporated into the Income Tax Ordinance, 2001.

Given the global trend of tax reduction and the growth in popularity of use of international business vehicles which, if appropriately structured, pay little or no tax anywhere, there has been continuous drain of profit by way of transfer pricing out of Pakistan. Moreover, international trade has clearly called for the need of exchange of goods or services amongst group entities in different jurisdictions.

Cross-border activities are no longer confined to the transfer of goods and materials, but evolving in variety and sophistication. Multinational companies engage in transfer of intellectual properties, and provision of management and consultancy services. Financial institutions engage in projects with their international partners in fund raising. All these activities involve allocation of income among parties in different jurisdictions and businesses are thus exposed to tax risks on transfer pricing either locally in Pakistan or in locations where related entities operate.

Businesses may also tend to allocate their profits to jurisdictions with lower tax cost or to locations they fear they may be challenged (i.e. transferring amounts more than necessary), and thus depriving Pakistan its fair share of revenue. I propose that specific transfer pricing legislation and, in the context of advance ruling, the international transfer pricing methodology be adopted to ensure the predictability of tax liabilities for cross-border transactions as well as international trade and business; and to ensure businesses, when engaged in cross-border activities with related entities, do pay their fair share of tax in Pakistan.

As stated earlier, traditionally Pakistan has a higher tax regime, and thus outward transfer of profits is generally a concern. Advance countries like US, UK, Japan and Germany have adopted specific transfer pricing legislation modeled on the OECD report. ITR2002 rules are ambiguous, badly drafted and are not closely connected with OECD report. In moving towards a greater integration with global economy, we need to adopt the internationally accepted pricing method. In furtherance, the advance ruling is not as per international standard.

A narrow tax base is still contributing to our budget deficit. The mere reason for such narrow base is the inappropriate infrastructure whereby the partnership firms are not necessarily required to be registered with registrar of partners while the sole proprietorship have no such registration requirement. It is suggested that partnership firms are required to be registered under the partnership act, 1932 while a commercial registration department needs to be established for sole proprietorship concern instead of shop Act. Government should also consider revamping of ages old partnership act which is out of date now.

Prolonged budget deficit has deterred the governments from adopting effective measures such as reduction of direct taxes to revitalize the economy and undermine our ability to meet our social and infrastructural needs. This problem is linked with the literacy rate of our country and will be worsened if the proportion of allocation of budget towards education is not increased and used economically, efficiently and effectively.

However, as a long term solution, I believe that children should be taught about tax and pensions in secondary school apart from civic sense. Basic lessons that explain how and why they will pay tax and EOBI contribution and why making early provision for pensions pay in order to supplement the purpose of section 63 of Income Tax Ordinance, 2001. This will reduce the Burdon of educating taxpayer in future.

Incentives to promote human resource development

Talent is the key to knowledge based economy. Our tax system should create best conditions for evolving knowledge based economy. To encourage our businesses to upgrade the skills of their employees and to build up their human capital, it is suggested that 150% deduction be provided for qualifying cost of staff and training. People will support the government for providing adequate resources on education to prepare our young generation for a knowledge-intensive economy.

Government must consider the concept of important person for the foreign exchange earners. This may allow the nationals working abroad to be dealt on priority basis at the airport etc.

Incentives for creation of intellectual property

Intellectual capital is the key feature for an innovation driven and high value added economy. Our tax system should provide generous tax treatment for expenditure on creation of intellectual property and intangible assets. Government must subscribe the comments of world economic forum that encouraging research and development is our main policy to strive for success. It is suggested that Government should allow a 200% deduction for research and development expenditure, incurred locally, to promote the development of brand name, high tech products and product with significant intellectual property content. Only providing amortization for intangible asset is not sufficed in this globalization.

Incentives for tourism

Tourism is one of the fast growing sectors of our economy. In order to be consistent with the principle of supporting core industries it is suggested that Government should introduce an incentive for new investment and upgrade of service quality in tourism. It is further suggested that a one off deduction for refurbishment cost and 150% deduction for a marketing campaign on international news channels solely for Pakistan tourism purpose by the business.

Indirect Tax - Goods and Service Tax [GST]

Government should have to decide whether it will continue with the two constitutional limbs of sales tax on goods by the federation and sales tax on services by the provinces. Even after the promulgation of Sales Tax on services, which the provinces are unable to collect and is apparent from the laws itself, there is no big move in this direction. In furtherance, this sales tax is further allocated to the towns under the local bodies' scheme but with no little improvement.

Goods and services tax is a system in which all residents will participate and will spread the tax burden broadly and fairly over the masses. The system would become a more resilient tax source and more immune to economic ups-and-downs. The system would be a more economically neutral form of tax as it will minimize economic distortions by covering a broad range of goods and services and collection of this tax will not affect the economy. The system will raise a huge amount of tax as a compensation of low tax rates. The essential characteristics of such tax system would be simple, cost effective, low tax rate and broad coverage.

However, the Government must utilize this GST to reduce our direct tax rate. Under no circumstances the GST become a means for a lax control of public expenditure and I suggest a flat tax rate of 5% with no categorization. Apart from the essential characteristics of GST system, mainly simplicity and effectiveness, public education and propaganda are also important to its success. I suggest the government to promote GST not as a single tax but the whole GST package covering all corresponding measures and a detailed study of its impact on personal expenditure, in particular on low income group, and related compensation proposed.

FAIR SHARE OF ENVIRONMENTAL COST

On the environmental side I am of the opinion that economic loss caused by the pollution should not be borne by the society as a whole. Tax measures should be an integral part of strategy to tackle environmental pollution and polluters should share the tax burden. Many companies re locate their operation where environment is more attractive as pollution brings adverse economic impacts causing higher rate of absenteeism, higher medical bills, reduction in revenue from tourism and re-location of highly skilled person. In the past, government initiatives to tackle pollution issues were in the form of legislative restrictions. People will welcome tax measures to encourage innovation on anti-pollution technologies and equipment.

Green taxes

People will support the introduction of green taxes. Without a tax on environmental protection, costs incurred by the environmental damage are borne by the society not by the environmental polluter.

The principle of green tax is that polluter pays because those who contribute to the environmental damage should shoulder the tax burden. Green taxes will also induce the polluters to develop less polluting technologies. This will also become a new source of government revenue and can be utilized to further tackle the environmental issues or to reduce the direct taxes further.

Although green taxes are environmentally and socially justifiable but given its practical difficulties, a public consultation on the detailed proposal be conducted. The consultation should cover the types of green taxes suggested, approaches to determine the level at which the taxes are set and a study of the effect on our economy.

STABLE PROVISION FOR THE SOCIETY'S NEED

On the social side, our society has become increasingly demanding for the provisions of social welfare, healthcare and education. The capability of our government to meet these needs depends on our fiscal situation, which in turn depends upon our success in economic restructuring, broadening our tax base and efficient utilization of public resources.

The success lies in a concept similar to privatization! People will support a small government with outsourcing of public services for a better management. The capability of our government to continue to provide stable welfare and quality education depends to a great extent on our financial situation. With a structural budget deficit, we have experienced increasingly difficulties in meeting demands of different interests. This has led to public dissatisfaction with our administration and affected adversely our social stability.

Restoring our budget deficit and maintaining a sound fiscal reserve are the keys to addressing adequately the social bottom line of sustainability. The trend of increasing social needs runs parallel with the trend of global competition for capital and personnel, while against them is the trend of declining number of taxpayers. This brings about a great challenge in managing our public finance. A success in economic restructuring and broadening tax base would help meet this challenge.

As suggested, outsourcing of public services is an appropriate approach to enhance cost effectiveness and benchmarking to comparable services provided by the private sector. This will serve as a reference in order to determine whether outsourcing of certain services or projects is more cost effective! The efficiency of resource utilization in key policy areas should also be reviewed regularly and a mechanism should be put into place to conduct a full review of cost effectiveness of each policy bureau.

CONCLUSION