Minimum & Banking Transactions’ Tax

The following article has been published in Daily Nation, dated 27th July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-27/page-9)

(Onlinehttp://nation.com.pk/business/27-Jul-2015/minimum-banking-transactions-tax)

Minimum & Banking Transactions’ Tax

By: Omer Zaheer Meer

With the stated aims of supporting the entrepreneurship culture, facilitating businesses and increasing the numbers within the ambit of formally documented economy, one would expect steps by policymakers to incentivize the masses to this effect. Notwithstanding several positive developments, some recent steps have actually served in contradiction of the above aims of the incumbent Government.

Before diving into the specifics let’s briefly discuss some important building blocks. First of all, most of the modern economies have moved away from been solely or greatly based upon agriculture or manufacturing to a greater focus on service sector, then be it financial, IT, educational, telecommunication or other services within this sector. Even those with a large base of agriculture or manufacturing have modernized to include service industry as a significant part of their overall GDP. It is therefore essential for a successful modern economy to promote service sector with the underlying GDP growth and employment opportunities acting as prime motivators. Similarly in a country like ours where, as per some studies, the black monies and illegal economy outweigh the documented formal one, reforms are required to incentivize people to come within the ambit of documented economy.

With the above been clarified let us move onto some extremely important issues with serious ramifications for our economy. First up a minimum tax on service companies has been levied from fiscal year 2015-16. But what does a minimum tax mean? For our tax dilettante readers, it means that the advance tax paid by service companies will not be refunded in the event of them ending up in losses at the financial year end. This is not only unjust but would have serious negative implications for the service sector growth. Moreover it also has the potential to entice this sector towards “creative accounting” to avoid paying any more taxes then the minimum they have to since they will not be getting any refunds due to them in the past in their hour of need.

This “creative accounting” argument was actually floated as an initial reason for attempting to introduce the minimum tax on service sector several years ago under pressure from international lenders. This was done in a controversial manner despite an existing section of the Income Tax Ordinance 2001 already dealing with the minimum tax on companies. The matter led to serious misgivings from the tax payers and after long heated debates the last finance bill included a proposal to restore the original position before the controversial insertion in section 153. The original position was that any tax paid in advance was adjustable against the final tax liability. Unfortunately at the last moment the policy makers again succumbed to certain pressures and instead introduced the minimum tax. In doing so the long term impact on tax net and GDP growth was ignored in favor of the short term cash accumulation to meet annual targets.

Several responsible officials have shared in private that this amendment was based on the underlying assertion that all mobile companies, a sub-sector within the service industry, were preparing falsified accounting records to avoid due tax and thereby causing losses to the national exchequer. Even if we accept the notion, this observation was based upon a sub-sector only and it was therefore inherently unjustified to “punish” an entire sector for that. Moreover this was equal to declaring that since some- murderers are able to deceive with the judicial system therefore all accused from now on would have a body part amputated as a presumed minimum punishment. Not very just, is it?

Instead an overhaul of the system with effective implementation along-with introduction of stringent penal clauses would have served the purpose more effectively. Last but not the least, even the existing audit provision, if implemented properly was sufficient to deal with the problem. We therefore propose and expect the policy makers to review this matter positively with a strategic view of expanding the GDP and broadening the tax-base rather than diminishing it. Volume over margin is the way forward for a progressive taxation regime.

Next up is perhaps the most controversial issue of the imposition of advance tax on banking transactions by non-filers. After a lot of uproar from the business community, the negotiations with finance ministry officials resulted in the concession that the levy of 0.6 percent withholding tax was reduced to 0.3 percent till end of September 2015. Any non-filers after that date would be liable to the rate of 0.6 percent again. However, a section of business community has rejected this and is planning to force a change by strikes and protests.

While the underlying aim seems fairly positive in that the non-filers are incentivized to come within the ambit of documented economy, there are certain qualifications to that. Firstly many individuals particularly salaried ones get their tax deducted at source and as such do not file income tax returns. This is despite them paying more than their due shares of taxes if all the indirect taxes on their consumption are taken into account. A lack of awareness and the bureaucratic difficulties within our taxation apparatus are the biggest reason for this trend. Secondly the lack of trust in the authorities and Governments by the business community is a big barrier.

Some of the concerns leading to the lack of trust are seemingly genuine and warrant corrective actions. A case in point is the undue relief given to influential tax payers while the ordinary one having to waste material resources in order to get their genuine rights like refunds due to them. Moreover the undue nuances caused to even genuine businessmen by certain elements within the taxation apparatus cements the belief that it’s beneficial to stay out of the system to avoid these troubles. Moreover taxing every transaction over Rs. 50,000 at 0.6%, when aggregated, takes the total cost to inexplicable levels making it attractive to avoid banking channels for those not bound to. The crux is that trying to impose a reform like taxing banking transactions without addressing the inherent limitations and problems of the taxation system may not be the most effective way to address the issue of widening the tax-net and should be re-considered.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Imran-Reham Khan Wedding & Economic Impact of Celebrity Marriages

The following article has been published in Daily Nation, dated 12th January 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-01-12/page-9)

(Online: http://nation.com.pk/business/12-Jan-2015/economic-impact-of-celebrity-marriages)

Economic Impact of Celebrity Marriages

Prof Dp

By: Omer Zaheer Meer

Cricketer turned philanthropist turned educationist turned politician and a national hero Imran Khan’s wedding with current-affairs TV host Reham Khan captured the imagination of the entire Pakistani nation. While his political opponents were trying to play below the belt, his supporters were celebrating. Though some criticized the timing of the wedding, which in the first place is a private matter, overall the national mood was one of jubilation. The media loves anything related to Imran Khan and his wedding was given unprecedented coverage with hype created by days of speculation followed by most of the prime time across channels being dedicated to the news of the marriage of the most-cherished national celebrity.

It’s simply amazing to observe how some people wrongly believe and propagate that being in a leadership position warrants non-human tendencies or inclinations. What is often missed in such petty arguments is the fact that a satisfied personal life leads to a better professional one be it political or any other field. Anyhow this is not the main topic under discussion today. Although the above-mentioned wedding has been analyzed and discussed from various perspectives, the economic impact of such high-profile marriages is still largely an unchartered territory. This largely ignored aspect will be the prime topic of the rest of this article.

Any modern economy is driven by the overall confidence of the stakeholders including consumers as well as the investors. Good law and order situation, political stability, fiscal prudence, growing foreign reserves, e.t.c. all basically contribute towards building the confidence in an economy. There are also some lesser explored avenues that enhance confidence in economies. Celebrity marriage is one of them.

First of all, national economies are driven by the contribution of the individuals, couples and institutions in the society, hence the concepts of GDP, GNP, e.t.c. Celebrity marriages (particularly like the Imran-Reham Khan ones) create an over-all “feel-good” factor in a nation. This translates into increased consumer confidence, keeping all else equal. Moreover this further strengthens the institution of marriage which itself generate a lot of economic activity particularly in South-Asia due to the various traditions as well as due to long-term financial implications as explored later in this write-up. Such widely-publicized celebrity weddings are common in the west and other developed economies. However in Pakistan, on one hand there are few true high-profile celebrities and on the other hand they prefer to exercise their right to keep their marriages private making high-profile celebrity weddings a rarity.

Celebrity marriages also strengthen the institution of marriage in a society which carries lot of economic positives for national economies. In addition to a married couple’s personal financial situation, a marriage impacts the general economy too. Married people normally accumulate money, thereby enhancing the overall savings in an economy which are used to contribute during the recessionary economic cycles. With the responsibilities of marriage, couples start giving due importance to financial planning too. They save and spend on large purchases and investments in a more financially prudent manner which is not normally the case with single persons. Synergy of resources of the married couples also creates larger pools of resources as well as motivated labor/investors, which all leads to increased economic participation and output. The spending on houses, children, investment properties, e.t.c. are the important things that keep an economy spinning and are propelled by marriages.

Another important aspect is that the philanthropic activities are undertaken by most of such high-profile couples. Imran Khan’s philanthropic work ranges from the field of medical (Shaukat Khanum Memorial Cancer Hospital and Research Centre) to education (Namal University). Similarly Reham Khan has shown interest in the field of educational philanthropy. The interest and excitement garnered by the high-profile celebrity marriages can also be harnessed to further philanthropic causes which not only provide social good but also economic stimulus depending on the magnitude of the project(s). This is evident from the positive way in which Imran Khan & Reham Khan had launched appeal for masses to contribute towards Shaukat Khanum Memorial Cancer Hospital instead of sending them wedding gifts. With this let us congratulate the newly-wed couple and wish them as well as the country peace, prosperity and a better future.

 The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk