An intense global debate now seems to be also finding its way into Pakistan and which concerns, How and should capital gains be taxed? Some gains are essentially indistinguishable from income - the predictable rise to maturity of a bond or savings certificate issued at a deep discount - but other types of gains are altogether different in character. Suppose the price of wheat rises because of a crop failure on the other side of the world (remember it happened in Pakistan to sugar last year), then it would be unreasonable to add the increase in the value of a farmers property to the cash he earns from selling his products. To do so would be to tax him both on the receipt and on the expectation of it. I know a lot of people will turn around and say that there is no income tax on agriculture in Pakistan, but replace the word farmer with trader or a grain corporation (likes of Lever, Monsanto or Mitsubishi of this world) and the argument still applies powerfully. It might seem that carefully crafted legislation would distinguish one kind of gain from another. For example, in Greece, Portugal and Spain we are seeing these days an attempt to particularly tax the deeply discounted bonds. But the task is just too hard. Changes in capital values mostly result from changes in expectations, and expectations are not things that tax inspectors can either measure or perhaps should not even be allowed to measure There is also another practical problem: It is often impossible, and inequitable, to collect tax on a capital gain if the gain has tangibly not been realized. Any attempt by countries (developed and developing) to legislate complex distinctions inevitably has unintended consequences. The results frequently benefit people whom the framers never had in mind. For example, in neighbouring India, an attempt to make concessions for business assets had the preposterous consequence of giving favourable treatment to carried interest. The businesses of private equity houses, fund management companies and stock brokerage houses clearly benefited. So the typical compromise invariably is to tax all capital gains, but to in effect tax them more lightly than income. It is by no standard an ideal compromise, like imposing a short sentence because you cannot tell whether the defendant is guilty. Also, such an approach works better when income tax rates are low. When rates are higher (we can safely assume ourselves, meaning Pakistan, to be in the higher bracket), problems multiply, especially since the distinction between income and capital gain is not fixed by nature but often susceptible to manipulation by taxpayers. Are recipients of capital gains more deserving than recipients of income? They are certainly, on average, richer: who already have some capital. But here too, the answer is that some beneficiaries of capital gains are deserving, while others are not. Most of us should wish well the people who build up successful businesses, and hope there will be more of them. However, at the same time we see speculators, day traders, and outright portfolio investors making grossly large gains on their invested capital, and to an average observer it seems wrong to tax them more lightly than those who work all day or undertake risk to generate employment for the same or invariably lesser amount of financial return. People who might be liable to capital gains tax are probably more mobile than people who make their living in other ways. But we need to be careful about this argument. For example, the purchase of prime real estate with money whitened through foreign remittance or in a worst case scenario with money obtained through corrupt practices can quite easily fall into this category. It is also shaming when large brokerage house managers pay a lower rate of tax than the people who labour in manufacturing sheds. If the cost of putting things right is that the rest of us have to pay a little more - and I am not sure whether there is indeed such a cost - then I for one am willing to contribute my share. A society, in order to succeed, depends upon the willingness of ordinary people to pay considerable amounts of tax with a fair degree of honesty and only modest levels of complaint. We in Pakistan tend to consistently jeopardise this fragile construction by being amongst nations with lowest 'income tax to GDP ratio. In this context, while one can surely understand counter arguments with respect to transparency, fairness of levy, direct versus indirect prevalent taxation slabs, reciprocity and corruption within the tax collecting agencies, but the fact remains that such a low collection of income tax makes a tax like the capital gains tax an even more important tool to sustain state revenues and to maintain an equity within the structure of 'income tax over the years to come Therefore, really there is no simple answer to this question cum dilemma of: How capital gains should be taxed in Pakistan? If we look around, we notice that different regimes in the world with varying tax systems and laws have different or varying stance on how and whether to apply the capital gains tax. On the individual front, we notice that the people who express strong views are usually the self-interested individuals who have not thought about the question for very long especially from a national perspective However, the common ground that one generally witnesses in most of the developed economies of the world is that the levy in fact mainly falls in the purview of a political compromise at the given time. Still, the most objective test of how much capital receipts enhance taxable capacity in a respective country lies in the specific observation of what its people do with them when they receive them. That is why most economists believe that the best or the safest answer to the question is moving in the direction of taxation on consumption rather than on income. The Pakistan government also in this respect needs to ensure that in trying to raise its tax revenues it does not deviate from this principle and instead of reinventing the wheel, just do what other sensible governments are already doing