Islamabad, Aug 10: Pakistan’s Finance Minister designate, Asad Umer, in an interview to Bloomberg has said  that to make businesses competitive with regional countries, Imran Khan’s administration plans to decrease taxes on energy supply to industries and agriculture and recover the consequent loss in revenue through introducing a wealth tax.

A wealth tax is defined as a capital tax or equity tax is a levy on the total value of an individual’s assets, including bank deposits, real estate, assets held in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts. However in Pakistan, wealth tax until its repeal was also charged on ownership of incorporated businesses.

Under Section 116 of the Income Tax Ordinance, 2001, every individual who files a return of income for any tax year is also required to furnish a wealth statement and wealth reconciliation statement for that year along with the return.

In 2015, the PML-N government increased the disclosure requirements for taxpayers and no longer allowed relaxation from filing for those whose income was less than one million rupees, however earlier this year, the FBR amended the wealth tax form (pertaining to serial number 15): previously a taxpayer was not required to explicitly state the nature of immovable and moveable property and assets held outside Pakistan including minute details like type of property and complete address the new form required itemization of total wealth.

In addition, the recently concluded tax amnesty scheme under which a significant number/amount of undeclared assets have been declared may present an enticing opportunity to levy Wealth Tax.

However, before embarking on levying this tax, likely future finance minister Asad Umar would do well to check the efficacy of this tax when it existed in Pakistan. The highest-ever collection under this head was 8 billion rupees whereas the FBR’s cost in collecting this tax was about a billion rupees. This tax was repealed because it is regressive and militates against savings, industrialization and documentation within the economy. There are only a handful of countries that have retained this tax. India too repealed this tax in 2016. The focus of tax policy should be on taxing incomes in all shapes and forms and not assets/capital formation which is the need of the hour. As it is, Pakistan has had the lowest rate of national savings in the region and levy of this tax would penalize savings.

Pakistan Tehreek-e-Insaf’s (PTI’s) victory at the polls is partly attributed to its pledge to the people of this country to end corruption and reform the inequitable tax system, thus to maintain that a wealth tax is under consideration may, semantically at least, be attractive as a populist measure but would be disastrous for efforts towards putting the economy back on track and on a high growth trajectory that would necessitate substantial investment.

The bulk of revenue in Pakistan is collected from indirect taxes (whose incidence on the poor is greater than on the rich), with heavy reliance, to the tune of over 70 percent, on withholding taxes during the past five years under direct taxes collections even though the taxes are imposed in the sales tax mode (for example, a tax on cheques above 50,000 rupees is payable by the individual whose income tax has already been cut at source as well as the non-filer though the rate is different for the two categories). In other words, the tax structure needs an urgent revisit to render it equitable and fair, however, the question is whether imposing a wealth tax would further this objective.

Wealth tax has been rescinded by most countries as a potential source of revenue because it is anti-investment and savings as it taxes assets created out of tax paid funds that is inherently unfair. In a country like Pakistan where the number of non-filers far outpaces the filers there is a danger that the undocumented economy, estimated at over 50 percent of the national economy, may simply rise. One option to make the rich pay more would be to impose a super tax on the rich and in the budget for fiscal year 2016-17 India replaced the wealth tax with an additional surcharge of 2 percent on the super rich. Pakistan also levies a super tax on all those with an income of 500 million rupees or more annually.

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