Prime Minister Shahid Khaqan Abbasi announced yet another Tax Amnesty Scheme yesterday. It is the second tax amnesty scheme offered by the present PML-N government that came to power in 2013. The first tax amnesty was introduced in 2016 which failed to achieve the targets. The PM unveiled five points tax amnesty scheme that will remain enforced till 30th June 2018.
There are good measures taken in this amnesty scheme. The drastic cut in the income tax should encourage the more people to bring in the tax net. It looks good on the papers but the real impact needs to be seen in the coming days. The government has pinned high hopes in this scheme to bring home enough investment to turn around the economy. Pakistan needs money to fulfil its financial commitments. Government can collect much needed money with successful implementation of this scheme.
The economic policies and measures are not judged on the basis of good intensions and wishes but on the basis of the results of such policies. Everyone agrees that Pakistan needs to widen the tax base. Pakistan needs to cut the corporate tax rates to lower the burden on the businesses and industries. The universal practice throughout the world is to keep the corporate taxes lower and to impose higher taxes on individual incomes. The lower corporate taxes help to document the economy and to discourage the black economy.
But in Pakistan, a completely different approach and policy was adopted from the beginning. Pakistani authorities kept the corporate taxes higher and income tax on individual income lower. The new tax amnesty scheme again failed to address this issue and to make the correction.
Pakistan needs radical and fundamental reforms and changes in the tax system. The present system is repressive, retrogressive, discourage the tax payers, bureaucratic and corrupt. Pakistan needs a national tax service to collect the taxes on more human way.
The tax authorities remain under pressure to keep on increase revenue generation every year, but have failed miserably at increasing the size of the tax base. The culture of tax evasion and tax avoidance is simply too deeply entrenched for an idea like this to bear fruit.
Historically, all tax amnesty schemes launched by different governments have failed. In fact, Pakistan has a tax amnesty scheme in the form of section 111(4) of the Income Tax Ordinance, 2001 that ensures that no question will be asked for any amount of money remitted from abroad through normal banking channels and encashment in Pakistani rupees is made. This section is basically in place to encourage remittances.
The last five amnesty schemes announced by the different governments all failed to produce results; therefore, this new scheme is facing questions and scepticism. In fact, what has been seen to a great extent in the past is that these schemes were mostly availed by registered taxpayers to legalise those parts of their ill-gotten wealth and undisclosed assets which they had concealed from tax authorities over the years.
January 2016 began with a government New Year gift for tax evaders on payment of ludicrous one percent tax on their black money, and ended with a December present to enterprising citizens who ‘absent-mindedly’ forget to mention real estate holdings in annual tax returns, again with a minimal penalty. Both schemes still failed to come up to rather buoyant expectations, and the latter were recently overhauled after the property business nearly collapsed. In fact, a hat-trick of amnesty schemes since 2013, when the ruling PML-N swept into power, has yielded little of note, and wary investors are too savvy to take any chances with a government that froze Foreign Currency Accounts in 1998, after first encouraging their growth and holding out assurances of their secure status. But it seems no lessons have been leant from past failures, as yet another one-time amnesty scheme to provide legal cover to Pakistanis’ off-shore and other foreign wealth, the Foreign Assets Declaration Scheme offered. The government expects this measure to net $2-6 billion in a short period provided constitutional and legal guarantees are extended against the inquisitive NAB and harassing FBR, with a two to five percent tax rate.
Reportedly, the Indonesian precedent, where a similar incentive to legalise foreign assets netted $30-40 billion, tipped the scales in favour of this step. But this is akin to putting the cart before the horse. For the real prerequisites for our badly under-performing economy were mentioned later by the PM, namely broadening the tax base and documenting the wealthy, using NADRA technology, lowering taxes, tax reforms, and stabilising the massive deficits opening up all over the fiscal front. The IMF, World Bank and political parties PTI and PPP, too, look askance on artificial, short-cut, amnesty schemes as they discourage honest tax-payers and indeed facilitate tax evasion.
Tax amnesty programs are often used by governments to improve tax compliance and to increase tax revenue. However, the policy choice to provide tax amnesty often results in adverse consequences, including the violation of other legal rules. For this reason, the policy choice to offer tax amnesty is often controversial. The amnesty policy and resulting program offered by the government has been criticized in past because it is considered to be unfair and an undue favour to the tax evaders. In particular, the tax amnesty law offered special treatment to taxpayers who participated in the program, such as no checking of the source of funds, no checking of the financial statements reported by law enforcers, protection from punishment on the financial reports provided to the Federal Board of Revenue and the requirement to pay only a small penalty.
The policy decision to provide tax amnesty is considered controversial, because such policy weakens the morale of taxpayers who are otherwise obedient and pay their taxes. Critics also argue that tax amnesty program would also, in the long term, affect the tax compliance of the Pakistani people, because they will not feel the need to pay taxes at all, and would pay taxes only when tax amnesty program will be announced again. Waiting for new tax amnesty program is more convenient, and experience shows that they would be forgiven through the program. There are at least three important weak points in the implementation of tax amnesty scheme.
Examining past tax amnesties in Pakistan reveals that these schemes failed to accomplish their ambitious goals. Successful amnesties in other jurisdictions of the world are also yet to be fully explained – let alone to be predicted in advance. Thus, tax amnesty puzzle prevails in the sense that nobody is really sure why one amnesty produces successful results whereas another amnesty does not.
There are multiple variables determining the success or failure of tax amnesty scheme. In Pakistan’s context why tax evaders will reap the benefits of tax amnesty scheme when other variables like weak enforcement of the tax laws, corrupt practices, low confidence on government for rational spending of tax revenues and lack of transparency in government mechanism persist.
Amnesty scheme can become successful if followed by strict measures and severe punishments. But to do all such things, Pakistani economy needs fundamental reforms. Pakistan needs progressive tax system, modern and progressive industrial policy and a plan to energise the agriculture sector. The economic model based on trade and consumerism has failed to solve the economic problems of Pakistan. Pakistan needs a new model of economic growth. Pakistan can learn from China how to reform the system to achieve historic growth and development. A comprehensive reform package can made this amnesty scheme successful. Carrot and stick policy can made amnesty scheme fruitful.
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