Reducing Inequalities

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Reducing Inequalities

Bilal Hassan

What are the policies of the government that are contributing to rising income inequalities in Pakistan? and how to reduce these inequalities remains a pivotal question to be answered. Here are some remedies to address the situation:
Imposing taxes on rich and affluent persons
Inequalities can be reduced by imposing higher taxes, especially income tax, on the rich and affluent class rather than levying sales tax which even the poor have to pay along with the rich. In all the developed countries, this model is followed. Currently, Pakistan collects a major part of its revenue – about 60% – from indirect taxes. The incidence and burden of indirect taxes is on the poor. Income tax is a major direct tax levy in the country and is largely collected through withholding taxes, which have the potential to become part of the cost of products and services. There are numerous exemptions and concessions in the income tax statute but they are largely for businesses.
In the Finance Act, 2022, the government introduced taxes on capital assets and high-earning persons. For example, the government introduced capital value tax on moveable and immoveable assets including motor vehicles with engine capacity exceeding 1300cc; electric vehicles with battery power exceeding 50kwh; foreign assets of resident individuals with an aggregate value exceeding PKR 100 million on the last day of the tax year through section 8 of the Act.
Similarly, in view of the boom in the real estate sector and parking of massive money in this sector due to tax amnesties in the recent past, tax at the rate of 20% has been imposed on the deemed income of resident taxpayers, which is equal to 5% of the fair market value of capital assets situated in Pakistan.
Above all, the government imposed a super tax for the tax year 2022 and onwards to generate additional tax revenue at the graduated rates from 1% to 4% based on the income brackets from high-earning persons, i.e. tax at the rate of 1% on income between PKR 151 million and PKR 200 million; tax at the rate of 2% of income between PKR 201 and PKR 250 million; tax at the rate of 3% of income between PKR 251 million and PKR 300 million; and tax at the rate of 4% of income above PKR 300 million.
Furthermore, a super tax at the rate of 10% has been imposed on income above PKR 300 million earned by persons from the sectors: airlines, automobiles, beverages, cement, chemicals, cigarettes, fertilizers, iron & steel, LNG terminals, oil marketing companies, oil refineries, oil & gas exploration, pharmaceuticals, sugar and textile. In the case of banking companies, for the tax year 2023, the rate of super tax is 10% on income exceeding PKR 300 million.
An estimated revenue impact of these policy measures is expected to be PKR 250 billion. However, these measures could not be implemented as these are sub judice.
Excessive use of withholding tax provisions as well as an increased level of tax litigation on new direct tax measures suggests how difficult it is to raise revenue from direct taxes in developing countries like Pakistan. To reduce inequalities, it is imperative to raise revenue through direct taxes. Materializing this requires strong policy interventions from the government backed by the courts.
Provision of equal opportunities
Equal opportunities in every field, especially in education, must be provided to the poor to enable them to compete on equal footing with students belonging to the elite class so as to enable them to get better jobs, which are essential to raising their income level and standard of living. In an article titled “Our Failure to Educate,” published in daily Dawn on December 22, 2022, the former Federal Minister for Finance, Miftah Ismail, has rightly prescribed education as one of the most important pillars for growth. The author has pointed out that “almost four in 10 Pakistanis remain illiterate. In 2020, the net enrolment rate in primary schools was only 64 pc – down from 67pc in 2015. Punjab and Balochistan maintained their ratios at 70pc and 56pc respectively. Yet Sindh’s net enrolment actually went down from 61pc to 55pc and KP’s ratio (even excluding the former tribal agencies) went down from 71pc to 66pc. Half of all school-aged children are not in school.” This shows clearly the abysmal state of literacy and education in the country.
Therefore, we have to improve literacy and education across the country by creating equal opportunities for all classes of persons. Otherwise, it will not be possible to reduce inequalities, which would further make it impossible to achieve a sustainable level of high growth and development.
Encouraging women empowerment
To reduce inequalities, it is essential to raise the level of women’s participation in economic activities. Needless to mention that women’s entrepreneurship has been growing rapidly across the world as women worldwide see entrepreneurship as a path to a better future. Many women in developing countries run businesses successfully, and many more aspire to become entrepreneurs. Women’s enterprises are on the rise everywhere in Pakistan but, still, a huge gender gap in entrepreneurship exists which needs to be bridged through various initiatives.
Financial assistance to poor families
As a short-term and immediate relief, food items at reduced rates through ration cards, along with free electricity up to 100 units, should be provided to every family. The provision of health card – though it should be restricted to only the poor – loans for business to unemployed youth along with technical courses (free of cost), enabling them to earn income, would also considerably reduce inequality as suggested by Shahid Zaheer, former Commissioner Inland Revenue, Federal Board of Revenue.
Pakistan is in a dire need of reducing inequalities and it requires additional revenue to finance expenditures not only on debt servicing and security but also on social services including education, healthcare, water and sanitation. Pakistan’s human development index (HDI) value is lower than both the average HDI value of countries in the medium human development group (0.630), as well as neighbouring South Asian countries (0.640), largely due to inadequate revenue to meet budgetary requirements of financing development and non-development expenditures. Pakistan’s tax collection of around 11% of GDP and the fiscal deficits are increasing.
To collect additional tax revenue for balancing budgets and improving ranking in the human development index, the federal government adopted new tax measures by introducing 1pc capital value tax on foreign assets, including immoveable properties of resident individuals and a super tax on high-earning persons, and also imposed a new tax on deemed income from domestic immoveable assets through Finance Act, 2022, to generate additional tax revenue of PKR 38 billion in a tax year. However, broad questions have been raised on the constitutionality and operationalization of these new taxes.
To reduce inequalities, other policy options such as educating the youth by providing equal opportunities, encouraging women to participate in economic activities and providing direct financial assistance to poor families require to be explored.

The writer studied Taxation Policy & Management at Keio University, Japan, and is serving as Additional Commissioner (Inland Revenue)
Corporate Tax Office, Lahore.

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