State Bank backs concerted taxation drive


KARACHI – The State Bank of Pakistan (SBP) views that the government should implement all the proposed levies including reformed GST, wealth tax, agriculture tax, capital gains tax and windfall tax to broaden present narrow tax base of the cash-strapped country.
“Arguably all of these proposals should be implemented to ensure widening of the tax base,” the State Bank said in its First Quarterly Report for 2010-11 issued on Wednesday. The central bank, expressing concern over the government’s continued failure to resolve outstanding problems pertaining to expenditure and revenue shortfalls, said the ongoing controversy over implementation of the proposed taxes was ‘unnecessary’.
“A variety of opinions have been offered on tax reforms, including the much maligned RGST (essentially VAT implementation of the GST), a wealth tax, extending the income tax net to agricultural incomes, levy of Capital Gain Tax (not merely on financial assets), and improved tax governance… in essence, the controversy is unnecessary,” it maintained.
It went on to say that there was also an intriguing suggestion for the introduction of a temporary windfall tax on some specific agriculture commodities that had seen an extraordinary run up in the prices. “The proceeds of the one-off levy could be dedicated to flood relief, significantly augmenting the availability of resources for reconstruction.”
The State Bank said introducing the above taxes would lead to lowering of the average tax rate in the economy to improve competitiveness. “In the final analysis, increased fiscal resources are necessary for macroeconomic stability and to boost development spending (health, education),” the bank said.
However, it said, the importance of the VAT-based tax did not arise in terms of immediate revenue-bearing potential as this might not be significant initially but due to the fact that if, properly implemented, it would provide economic agents with an incentive to document transactions (potentially leading to higher income tax collections as well).
“The implementation of fiscal reforms and elimination of subsidies in the power sector are likely to broaden the tax net and reduce distortions in the economy,” the SBP said. According to the central bank, the proposed reforms would reduce cost-push inflationary pressures in the economy in the short run, but in the long-run would also help sustain strong economic growth.