The biggest question on the new tax amnesty scheme announced by Prime Minister Shahid Khaqan Abbasi on Thursday is whether the traders will comply and will become taxpayers or will oppose it. The answer to this question will determine the final outcome and fate of this new tax scheme. If the government succeeded to bring even 20% big traders into the tax net then it will be a great success.
Pakistan has a history of amnesty schemes, starting from the first in 1958 to the one offered yesterday. Despite successive amnesty schemes, according to an estimate, the informal economy has doubled in size compared to the formal economy. The growing dark side of the economy plagues not only Pakistan but many other developing countries. Off-the-books transactions account for one-fourth of the global gross domestic product (GDP).
A meager tax-to-GDP ratio is a risk to our economy and is damaging the functionality of state. Pakistan’s tax-to-GDP ratio of about 12pc is the lowest regionally and among the lowest globally. Regularising off-the-book assets through amnesty schemes has failed to speed up tax recovery in the past owing to lack of public enthusiasm.
Amnesty schemes do not only discourage documented taxpayers by legalizing illegal assets at lower rates of taxes, but they also undermine the state’s capacity to tax in the future. The state’s power to tax its people is derived from its capacity to generate revenue and invest in purposive long-term activities to create an asset base for sustained economic development.
Successive governments tried half-heartedly to bring traders in tax net but all those efforts failed. Finance Minister Ishaq Dar introduced tax amnesty scheme for the traders with a lot of tall claims and funfair. But that amnesty scheme failed to appease the traders’ community. This is a most dismal failure and makes clear to all that the trader community is adamantly opposed to contributing anything to the tax base of the country, whether or not it is consulted or made part of the system.
In the past, the leadership of the trader community opposed tax measures that would make it incumbent upon them to file returns on income tax with arguments that they were “not consulted” when the tax measures were drawn up. They had no trust of the taxman, they would say, going on to point out that they were already paying taxes under other heads, like sales tax.
All these arguments are now washed away. The tax amnesty that has just failed to fetch the compliance of the trader community was drawn up by the leadership of the community themselves. It went through an extensive process of consultation. And paying taxes under other heads is no excuse; everybody pays taxes under various heads but that does not absolve anyone of the obligation to file an income tax return.
The traders have proved themselves to be a stubborn lot, and have made fools out of the government. The scheme had ownership all the way up to the top levels of government, with the prime minister himself approving its final shape, while the finance minister was intimately involved in the negotiations.
The fact that the senior leadership of the trader community consented to the terms of the deal, and then praised it publically, only to fail so spectacularly to obtain compliance with its terms, shows perhaps the limits of a negotiated path forward in broadening the tax base.
The trade has grown many folds in Pakistan but tax collection retail and wholesale business are limited. There is the big gap between the growth of services sector and its share in the taxes. There are approximately 0.5 million shops in Lahore, very few are registered and paying the income tax. The same situation exists throughout the country.
Take one more example. The PPP government launched the “Tax Registration and Investment Scheme-2012” under which undisclosed assets had to be legalized on payment of less than one percent tax. The government hoped to the net as much as R152 billion from that scheme and also double the tax-base to about 7.5 million taxpayers across the country. Nothing really materialized and scheme failed to achieve its targets.
The new tax scheme will certainly create no fans among existing users. Such amnesty schemes demoralize honest taxpayers and provide impetus to tax dodgers and evaders and add to the size of the black economy which has swelled to over 60 percent of the registered economy according to some estimates. It goes without saying that such schemes are against the fundamental rights enshrined in Section 25 of the Constitution.
Tax is a major source of revenue for most of the countries like Pakistan and it performs three main functions; it is the source of state income, a tool of policy regulation, and a means of income redistribution. Based on data from the Ministry of Finance, the tax is the largest contributor to Pakistan’s revenue budget, where almost 75% of Pakistan’s income comes from taxes.
The tax potential in Pakistan is actually very large, because Pakistan has 221 million population, and as many as 65 percents of this population are in a productive age category. Nevertheless, only 3 million people are registered as taxpayers out of which, less than a million pay their taxes on a regular basis. The low number of taxpayers, when compared with the productive age of the population, means that the government is not maximizing the potential revenue from taxation.
This has led to constraints in infrastructure development in Pakistan, and an increase in Pakistan’s foreign debt. The main cause of the low number of taxpayers in Pakistan is the widespread practice of tax evasion and tax avoidance. One of the most popular ways to achieve this is to hide income from tax officials in order to transfer the wealth abroad, so it is not detected by tax officials. Tax evasion and tax avoidance are widespread in Pakistan.
No political party has so far been able to come up with a viable road-map for increasing the tax base. No one has been able to figure out how to bring agriculture into the net, how to deal with the opposition that this proposal always faces. Tax amnesty schemes are a cop out. The only way is to pass effective asset-seizure legislation and confiscate all untaxed and undeclared assets. It would also not be a bad idea to build trust with tax-payers, that their money is being put to good use.
It is profiling and taxing people according to their expenditure patterns that contribute to the betterment of the taxation machinery of a country. Amnesty schemes encourage tax evaders by propagating the notion that another such scheme is always on the horizon to legitimize their illicit wealth.
To engender tax culture we need to make sure that the amnesty scheme will come as part of wider tax reforms with a mechanism to monitor spending. Without an equitable taxation system and compliance mechanism, the fiscal capacity of the state to tax becomes restrained.
The purpose of taxes is to raise revenue to run state affairs, to encourage economic growth and to deliver social services to citizens. For purposeful spending of taxed money under political stewardship, a monitoring and planning mechanism should be formed comprising the central bank, the Federal Board of Revenue and the Securities and Exchange Commission of Pakistan.
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13 November, 2019