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Capacity Taxation: The Pakistan Experiment
The underutilization of existing capital stock is a disturbing phenomenon in developing countries. Faced with this situation, Pakistan introduced a new tax in 1966 that was called a capacity tax. By taxing capacity output instead of actual production, the Government believed that the resulting decline in average tax rates as production expanded would stimulate output. In addition, administrative procedures would be simplified, particularly because the capacity tax obviated the need for the cumbersome production controls in effect under the excise system. The capacity tax was levied on five industries in lieu of the excise duties previously charged. Annual production capacities were mainly computed from past and comparative physical production data, although machine ratings were also used. The tax liability could be adjusted with the installation of additional machinery or removal of old equipment. Abatements were granted if production had to be halted for reasons beyond a manufacturer's control or in case of widespread industrial setbacks; a refund scheme was in effect for exports, and allowances were provided to stimulate regional industrialization. As borne out by Pakistan's experience, measuring capacity properly is a complicated exercise. No matter how much expertise and ingenuity are applied, inherently arbitrary elements remain. On the other hand, a capacity tax interferes less with the utilization of capacity than a conventional form of excise tax that relies on production controls. A capacity tax might be employed to facilitate the transition of an extended excise system to a sales tax relying on documentary verification, and it is a useful proxy for the excise or sales tax liability of small manufacturing units that do not keep adequate accounts. The incentive effects of a capacity tax are uncertain, although to the extent that it raises the price of capital, a capacity tax may induce entrepreneurs to use existing capital stock more fully. The industries subject to capacity tax in Pakistan were already operating at high utilization rates, because they relied on abundant indigenous raw materials. For other industries in Pakistan it may be surmised that the removal of constraints on the supply of raw materials, if possible, would have solved much of the basic policy conundrum. It seems appropriate to emphasize that if a government's objective is to increase production, an essential requirement is the provision of a suitable macroeconomic framework for carrying on business activities. Disincentives and imperfections that hinder an efficient functioning of the market mechanism should be removed before incentives to increase production are added to the government's tax policy arsenal; even then, their potentially beneficial effects should be carefully weighed against the costs of the uncertainties and administrative complications that inevitably follow their introduction.
Ketersediaan
| Call Number | Location | Available |
|---|---|---|
| SP2101 | PSB lt.dasar - Pascasarjana | 1 |
| Penerbit | Washington, D.C.: International monetary fund 1974 |
|---|---|
| Edisi | Vol. 21, No. 1, Mar., 1974 |
| Subjek | Tax policy Pakistan Market mechanism Existing capital Taxing capacity High utilization rates |
| ISBN/ISSN | 0020-8027 |
| Klasifikasi | NONE |
| Deskripsi Fisik | 43 p. |
| Info Detail Spesifik | Staff Papers (International Monetary Fund) |
| Other Version/Related | Tidak tersedia versi lain |
| Lampiran Berkas |