SOUTH ASIAN TAX SUMMIT

1. SOUTH ASIAN TAX SUMMIT Role of Tax Policy on Economic Development -Challenges & Opportunities for SAARC Region by Syed Shabbar Zaidi President South Asian Federation of Accountants

2. TABLE OF CONTENTS • History and Strengths • Economic Policy and Taxation Management • Impediments in Developments • The Present World & the World of Poors • Tax Culture in the Region • Laws and Administration • Taxation Laws and Administration • The Pakistan’s Initiative • Karachi Declaration • The Future

4. HISTORY, CULTURE AND STRENGTHS • South Asian region’s history in development of knowledge is incomparable. Arabic alphabets now being used in all sciences originated in India and the present form is the result of the combined efforts of Indian and Arabian scientists. This is just an example of our scientific heritage. • Lord Macaulay in his speech in the English Parliament in 1835 said that there is no thief or beggar in India. This was cultural heritage. • Per capita income and quality of life in Delhi, Lahore and Lucknow was much better than London, Paris and Rome in 1857. This was our economic strength. What happened to us over the last one and half century? Why we were colonized and became economically, socially and politically dominated?

5. HISTORY AND STRENGTHS • There is nothing wrong with the masses. The problem arose in the governance. There are empirical evidences that economic prosperity leads to complacency. That happened with us in the past. • Now there is no point in living in illusion. The purpose of narrating the history is just to give confidence and hope to the future generations. • The last one and a half century has proved that people of this region are: • Peaceful (we all became independent through a non-violent peaceful process) • Reasonably literate is an international language (English) • Tuned to international common law system (Common law) • Reasonable human mass for economic development • Coherent family system and space for spirituality. All these factors demonstrate that future century will be a knowledge economy and in that knowledge economy people of South Asia will have a significant role.

6. ECONOMIC POLICY & TAXATION MANAGEMENT (1) • In the post cold war era, we are living in unipolar system of economic policy. Communism is burried in Tienmann Square and capitalism is dying with ‘Subprime’ scandal in this Wall Street. The solution is welfare state. Government efficacy is judged by its governance of employment, poverty alleviation and quality of services of health, education and other amenities. • Collection of taxation revenue from all sources ‘equitably’ is the ‘only’ mechanism that can provide resources to the government for welfare. There are numerous studies and empirical evidences that availability of reasonable resources (at least 10 to 15 per cent of GDP) is necessary to sustain the society. In the developing country the need is even more. Thus, economy cannot survive unless we are ready to pay equitable taxes improve our tax systems.

7. ECONOMIC POLICY & TAXATION MANAGEMENT (2) • I reproduce the extract from a recent speech of P.Chidambaram the Finance Minister of India: “In the last four years, we have increased the tax to GDP ratio from 9.2 per cent to 12.5 per cent this year and next year it will be 13 per cent. This allows us to do what we have to on health, education, etc. Secondly, our government has been extremely prudent fiscally. We inherited a fiscal deficit of 4.5 per cent; this year we have reduced it to 3.1 per cent, and next year we will reach a fiscal deficit of only 2.5 per cent. On the revenue side, we inherited a revenue deficit of 3.6 per cent, this year we have brought it down to 1.4 per cent, and next year we will bring it down to 1 per cent. Now what does this mean ?

8. ECONOMIC POLICY & TAXATION MANAGEMENT (3) This means that I have more revenues, I have created fiscal space for the government to borrow more, if necessary, and I have created space for the Government in Parliament to spend on what they think are desirable objectives. The desirable objectives are, of course, education, health, rural infrastructure, drinking water, sanitation; You might ask what is there for industry. Well, infrastructure of industry is important. I believe we have laid the conditions for high growth and we have laid the pre-conditions for making this growth more inclusive.” Can we in this region, would be able to provide such facilities with less than 15 per cent Tax to GDP ratio ? The answer is no.

9. IMPEDIMENTS IN DEVELOPMENTS • Participative democracy • Governance • Quality of Primary education to masses • Economic models • Laws and administration

10. PARTICIPATIVE DEMOCRACY • Our democratic systems are insulated by beaurucracy for governance. This is no more workable. • Punchayat Raj in India, Devolution plan in Pakistan and Grameen Bank in Bangladesh are models of grass root participation in governance. • Things will change when elections will be won in these countries on the issues of employment, poverty alleviation etc. Why it is that taxation is a issue in US election not us?

12. GOVERNANCE • Governance, transparency and accountability are in principle alien to our culture. These are no more than political gimmicks. Bofors Scandal in India and many such instances in the region are taken as personal misdeeds. The real issue is different. We as a society have not been able to inculcate governance, transparency and accountability in our system. • Problem lies in continuity in ‘Sahib’ attitude. “Gora Sahib” has been replaced by “Kala Sahib” not only in government but in every segment of society including profession. This system can never generate equity in the society in the modern world.

13. ECONOMIC MODELS • Future world is bothered about Karl Marx and J. M Keynes. The icons will be Mr. Deng Siao Peng of China, Mr. Manmohan Singh, Mr. P Chidambaram, Mr. Sedarshan and Mr. Nani Palkiwala of India and Mohammad Younus and Mr. Amartya Sen of Bangladesh. Similarly we have role models like Mr. Abdus Sattar Edhi and Dr. Adib Rizvi in Pakistan. • There is no ready made economic model in Washington or in London. Learning from western experience we will have to design a model that can work in our societies. • Ratan Tata’s acquisition of ‘Corrus’ has to be read with the story when his visionary ancestors were refused the sale of a plant required for establishing steel mill in India.

14. THE PRESENT WORLD & THE WORLD OF POORS • In the present world capitalism is thriving. Business continue to grow, global trade is booming, multinational corporations are spreading into markets in the developing world and the former Soviet bloc, and technological advancements continue to multiply. But not everyone is benefiting. • Global income distribution tells the story: Ninety-four per cent of world income goes to 40 per cent of the people, while the other 60 per cent must live on only 6 per cent of world income. Half of the world lives on two dollars a day or less, while almost a billion people live on less than one dollar a day. • And despite the improved lot of many poor, the divide between the haves and is widening. As measured by technical indicators such as the Gini coefficient, income inequality is worse in China than in India.

15. TAX CULTURE IN THE REGION (1) • Tax system as laid down in our laws is culturally alien to our history. This system is the continuation of the industrial revolution which is imported in our societies. We do not own it, we have adopted it. Adam Smith needed taxation system as a cost of civilization. We already had one. • Our societies being traditionally agricultural in nature are used to land revenue on ‘assessment’ basis. • Since independence in all of our countries we are trying to dovetail the mindset of land revenue collection with taxability of income from businesses and commercial activities on net income basis. The results are not encouraging. Firstly we have to adapt it so we can adopt the same. • The other aspect for this epathy is again delivery and governance. Society consider taxation as a burden rather than share / contribution in the national expenditure for development. In some aspect they are correct.

16. TAX CULTURE IN THE REGION (2) • The situation throughout the region is same and we are lagging around 10 to 15 percent of GDP as taxes. • There is a need of education, participation and dialogue on the matter of the role of a vibrant tax system for the very existence of the society. Is this our priority?

17. LAWS AND ADMINISTRATION • There is a need for a big paradigm shift in our mindset. • Our societies have best of the fiscal and corporate laws but worst of administration in this sector. • This problem is related to the issue of participative government. Our economy will be seriously hindered if we continue with the same system of corporate and fiscal administration. • Why it is so that number of taxpayers in India are lesser than UK, but the number of reported cases are almost ten times. This is the real problem. We have most voluminous statutes and reported cases. Is it a credit or a debit. Procrastination is an attribute. • Are these statutes and case laws serving the societies and businesses. Do we still think that all matters will be settled at the Supreme Court? • Tax administration is a subject that has not been understood in its right perspective.

18. Present Tax and Corporate Laws are like this.

20. These have to made delicately like this

22. Streamline the laws and administration like this

24. TAX LAWS AND ADMINISTRATION (1) • We all love and and fully conversant about ‘assessment order’, ‘approvals’ and other such words. However do we know that in the modern world these things do not exist? • Taxation policy measures for economic development such as accelerated depreciation. The decision making process by and through courts (interpretation and application) and beaurucratic administration have all been confused. None of our university, even in India, has done any proper study about the real hurdle in the growth of tax culture. The problem is undefined role of various stakeholders which are: • The Economic Policy Maker • The Tax Collector at Higher Level (FBR or CBDT) • The Tax Collector at field level • The Appellate Forum • The Tax Advisor • The Business Man (Taxpayer)

25. TAX LAWS AND ADMINISTRATION (2) • In this whole process the losers are common people. • The real problem has arisen as Tax Collectors at higher level have become policy makers, if not policy breakers. The mechanism for the breakage in the system is quite simple. Field force (tax officers) being empowered to interprete at their will the matters to be ultimately decided by the Supreme Court. [Kaun jita hai teri zulf kay sar honay tak (Ghalib)] • The solution lies in simplification of laws. For exampIe I wonder the advantage of having a separate section dealing with income from other sources along with business income where the tax rate is the same. Why it is that in Germany all income are taxed under one head?

26. PAKISTAN’S INITIATIVE OF INTEREST (1) • Income Tax • Group Taxation • Group Relief • Inter Corporate Dividend • Taxability of merger / demerger • Taxability of sale of asset within the group • Compatibility of the Taxation Law for Transfer Pricing with OECD Model • Taxation for Arm’s Length consideration • Separate Schedule for Banking Companies

27. PAKISTAN’S INITIATIVE OF INTEREST (2) • Sales Tax • Across the board value added tax system • Federal Excise • Levy of Excise Duty on economic transaction

28. KARACHI DECLARATION (1) • This conference will only become useful when we decide that taxation policy and administration will lead to economic growth in the region and our objective is cohesive and cooperation. I as the President of SAFA suggest that we announce a ‘Karachi Declaration’ for the step towards cooperation in taxation system. The featues should be: • Multi-lateral Treaty for Avoidance of Double Taxation • There shall be Multi-lateral Treaty for Avoidance of Double Taxation for the region. • Regional Agreement for Trade & Services • There shall be no limitation on the rendering of services within the region i.e. Regional Agreement for Trade & Services.

29. KARACHI DECLARATION (2) • Net Working of Tax Professional Firm • There shall be regulatory framework for the development of Networking of professional firms within the region. • Harmonization of Taxes & Tariff laws • Replace Offshore Jurisdiction for Investment • There shall be actions to develop a system to replace offshore jurisdictions for investment in the region. • Cross Border Merger • Corporate Law to be appropriately amended to allow cross border mergers within the region.

30. THE FUTURE • The Karachi Declaration as envisaged be examined and there should be serious attempts to implement the same in practical sense. • When businesses will have initiative for regional cooperation other aspects will naturally flow. • The future of this region is very bright on account of the available human resources with strong cultural background and mathematical minds.

31. The beauty of the region is hidden and simple