How not to extend the tax net

It has been almost six months since the government announced its budget measure of levying withholding tax on non-filers of income tax for every banking transaction valued over Rs50,000 in a single day. Most ordinary citizens did not feel the pinch, but nevertheless did not look too kindly upon this measure. Many, however, were nudged into filing their tax returns due to this step. There were also those who tried everything to get out of fulfilling this legal responsibility, including beseeching the big wigs of the PML-N to take back the measure, and these were the traders. From protests to threats of shutting down shop, traders continued to voice their concerns. Finance Minister Ishaq Dar was unwilling and unrelenting. But given the intense pressure, the withholding tax rate was reduced and the deadline for the measure coming into effect extended.



Now, after almost half of the fiscal year has passed, it seems like the traders have won. An ‘asset regularisation scheme’ has been finalised to enable traders to be brought into the tax net. After spending years outside the net, the government would like us to believe that it has prevailed in a battle that shouldn’t have even occurred in the first place. By law, citizens and businesses are required to file their tax returns. When there is a violation of this law, there should be consequences. The fact that traders have managed to pile up assets while remaining outside the tax net and now don’t want the government to nose around suggests foul play. But the government is willing to bend. It will be asking traders to declare their hidden assets of up to Rs50 million by paying a nominal one per cent of the declared amount in taxes. Not only this, it will also be making an offer to the traders to pay a nominal rate of about 0.2 per cent of the total sales, as their full and final income tax liability. Pakistan’s income tax rates are generally mid-tier compared to the rest of the world, but its tax-to-GDP ratio is among the lowest. Indirect taxation forms a major chunk of the total revenue and this is so because people are unwilling to pay their due share of taxes. Schemes such as this one, where a high-earning group is extended leniency, will force other taxpayers to bear the brunt. Mr Dar might think he has played hard ball with a mighty group, but the battle has certainly not been won. He might be able to boast of extending the tax net, but the big fish cannot be considered to have been caught when they are being treated in a privileged manner.

Published in The Express Tribune, December 21^st,  2015.

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