Days after backtracking on its attempt to tax the textile sector, the government is planning to offer an amnesty scheme for sales tax evaders in that industry in an attempt to broaden the tax base.
Sources inside the Federal Board of Revenue (FBR) say that the federal government is in the final stages of putting together an amnesty scheme that is largely directed towards tax evaders in the textile sector.
In return for registering with the FBR, the government is likely to not ask any questions from tax evaders about the sources of their income used to finance their start-up costs or the size of their past revenues. Several businessmen have been reluctant to register legitimate concerns with tax authorities for fear of having to explain the source of their initial investment, which can sometimes come from questionable means.
FBR officials expect to register at least another 70,000 entities as sales tax payers through the amnesty. The current number of businesses registered to pay sales tax is 131,000, of which 99,000 are active taxpayers. The sales tax amnesty comes against the backdrop of an FBR campaign to take action against over 700,000 people suspected of evading income taxes.
Amnesty schemes are often regarded as a “moral hazard,” rewarding people for bad behaviour by legitimising their illegal activities and taking away the incentive from law-abiding taxpayers to stay within the law.
Critics point out that the government had considered a similar scheme two months ago but dropped the idea after encountering opposition from a member of the Inland Revenue Service.
The government launched a tax amnesty scheme two years ago which yielded only Rs2 billion in revenues but had the effect of bringing in Rs50 billion in assets from the undocumented to the documented segment of the economy.
Proponents of the amnesty claim that the additional revenues from the scheme will offset the revenue losses that the government is likely to bear after lowering sales tax rates on the textile sector from 17 per cent to between four per cent and six per cent.
The textile sector had previously been exempt from sales taxes but was brought back into the tax net through a presidential ordinance 12 days ago. The lowering of the rates is seen as a major retreat by the government in the face of pressure from the textile lobby, widely regarded as one of the most powerful in the country.
FBR officials admit that the lowering of tax rates on the textile sector will cost the government about Rs6.5 billion.
Textile industry sources say that they have been assured by the government that tax rates will be six per cent on cotton yarn and lower-order goods and four per cent of further value-added textiles. FBR officials say that unregistered businesses will not be eligible to apply for tax refunds, in an attempt to incentivise registration.
Some former government officials were pessimistic about the government’s ability to levy the taxes, given the capacity constraints at the FBR and suggested that tax evasion would remain rampant.
Published in The Express Tribune, March 29th, 2011.