SOUTH ASIAN TAX SUMMIT

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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

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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 Pakistans Initiative
• Karachi Declaration
• The Future

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HISTORY, CULTURE AND STRENGTHS

• South Asian regions 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?
  

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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.

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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.

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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 ?

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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.

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IMPEDIMENTS IN DEVELOPMENTS

• Participative democracy
• Governance
• Quality of Primary education to masses
• Economic models
• Laws and administration

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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?

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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.

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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 Tatas 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.

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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.

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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.

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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?

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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.

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• Present Tax and Corporate Laws are like this.

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• These have to made delicately like this

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• Streamline the laws and administration like this

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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)

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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?

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PAKISTANS 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 Arms Length consideration
• Separate Schedule for Banking Companies

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PAKISTANS INITIATIVE OF INTEREST (2)

• Sales Tax
• Across the board value added tax system
• Federal Excise
• Levy of Excise Duty on economic transaction

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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.

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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.

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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.

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• The beauty of the region is hidden and simple

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