A Case for Direct Taxation

By Huda, Huma | Economic Review, May 1990 | Go to article overview
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A Case for Direct Taxation


Huda, Huma, Economic Review


During the seminars organised by the government it has come out that in the next budget the government plans to broaden the tax base. How the government is to do it, it has yet to be seen. If the past experience is any guide this widening of tax will depend heavily on indirect taxes. In so far as direct taxes are concerned the widening will be cosmetic as. Mr. V.A. Jaffery Advisor Ministry of Finance has only spoken of eliminating of tax exemptions. It is not enough. What is required is to revive all those direct taxes which were abolished by the previous government. The merit in the direct taxation does not lie only in its contribution towards government revenue but also towards income distribution and sharing of the burden of taxation by the rich. The imposition of direct taxes is all the more necessary as during 1980s the burden of taxation has not been on the rich but mainly on low income groups through indirect taxation. It is therefore important to remind the budget makers about a number of direct taxes which were abolished during that period. Estate duty was abolished in 1979; Gift Tax was first reduced and was later done away in 1985-86. Capital Gains tax were also abolished. There were concession in wealth tax from time to time.

The maximum rate of present income tax was lowered from 65 per cent to 45 per cent. The rate of corporation tax was lowered from 52.5 per cent to 40 per cent. Besides the abolition of these taxes there were exemptions and concessions in the income tax itself. The source of National Bond Certificate is beyond the purview of income tax. In addition there is no tax on agriculture income. While no tax was imposed on agricultural income all kinds of tax concessions were granted to the industrial and trading sector. Is is argued by the Federal Government that agricultural income tax comes under the jurisdiction of the provincial government. The provinces do not want to impose agriculture income tax to improve their revenue but continue to depend on the centre to meet their budget deficit. The central government can make it incumbent upon the provincial government that they must meet a certain portion of their budget deficit through agricultural income tax. If the provinces can not do it they should not expect subsidies from the centre.

As for indirect taxes there is a great emphasis on the sales tax. In its effort to widen the indirect taxes the government as we know plans to impose the General Sales Tax. This means that there will be a tax at every stage of production and this will have to be documented.

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