Transcript South Asian Tax Summit

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
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2.
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10.
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
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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?
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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.
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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.
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The last one and a half century has proved that people of this region are:
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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
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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.
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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.
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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.
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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)
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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.
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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.
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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)
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The situation throughout the region is same and we are lagging
around 10 to 15 percent of GDP as taxes.
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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
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There is a need for a big paradigm shift in our mindset.
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Our societies have best of the fiscal and corporate laws but worst of
administration in this sector.
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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.
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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.
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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)
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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?
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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:
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6.
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)
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In this whole process the losers are common people.
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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)]
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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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PAKISTAN’S INITIATIVE OF INTEREST (1)
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Income Tax
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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
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PAKISTAN’S INITIATIVE OF INTEREST (2)
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Sales Tax
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Across the board value added tax system
Federal Excise
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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:
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Multi-lateral Treaty for Avoidance of Double Taxation
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There shall be Multi-lateral Treaty for Avoidance of Double
Taxation for the region.
Regional Agreement for Trade & Services
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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)
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Net Working of Tax Professional Firm
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There shall be regulatory framework for the development of
Networking of professional firms within the region.
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Harmonization of Taxes & Tariff laws
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Replace Offshore Jurisdiction for Investment
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There shall be actions to develop a system to replace offshore
jurisdictions for investment in the region.
Cross Border Merger
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Corporate Law to be appropriately amended to allow cross
border mergers within the region.
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THE FUTURE
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The Karachi Declaration as envisaged be examined and there should be
serious attempts to implement the same in practical sense.
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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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