Tax amnesty scheme — a challenge for new FM

It is tragic to know that a country that accounts for billions of business on a daily basis has a low tax-to-GDP ratio

Imran Batada April 28, 2019
The writer is Director ICT & Founding Director of Center for Information and Communication at IBA. He tweets @imranbatada

Amnesty scheme is not a phenomenon of developing countries like Pakistan. Rather countries belonging to the developed world such as the US, Canada, Australia, Russia, Germany, Italy, Spain and others have had more or less similar tax amnesty schemes. However, in countries like ours where the institutions responsible for tax collection are not performing up to the mark, amnesty schemes can have a negative impact on the economy in the longer run.

It is tragic to know that a country that accounts for billions of business on a daily basis has a low tax-to-GDP ratio. Tax collection has always been a challenge for Pakistan. Statistics reveal that out of the population of more than 20 million, only 1.4 million people file their annual income tax returns. Although in a short term, the tax amnesty schemes add a certain amount of revenue to the national economy, they are not a permanent solution to tax evasion. Instead of initiating a crackdown on benami (name-lender) transactions and imposing tax on undocumented assets, amnesty schemes provide tax evaders a back door to fool the system. Isn’t it a better strategy if asset-seizure policies are introduced so that untaxed assets get confiscated?

It is disturbing to learn that the government has finalised yet another tax amnesty scheme without implementing an asset-seizure legislation to confiscate untaxed assets, and laws to bring back looted money from abroad. There is a consensus amongst tax experts that amnesty scheme is always a failed story. The honest taxpayers get discouraged when they see that tax evaders can get away with their crime by merely paying a meagre amount to the government.

Without taking necessary measures to tackle the menace of black money, amnesty scheme is an act of surrender by the state machinery to the tax evaders. It shows government’s helplessness in resolving the issue of tax theft.

Pakistan has a history of amnesty schemes introduced by rulers. The roots of these schemes can be traced back to president Ayub’s regime in 1958. In that phase, more than 70,000 declarations of excess income were filed by more than 260,000 taxpayers. Later on, amnesty schemes implemented under ZA Bhutto, General Zia and Benazir Bhutto proved to be quite unsuccessful.

Last year, the PML-N government had announced an amnesty scheme. As previous other schemes, its purpose was to encourage people to become tax filers by being allowed to declare their hidden domestic and offshore assets. As per the scheme, tax evaders were given an opportunity to declare their hidden domestic and offshore assets at 5% tax rate. The scheme was also expected to provide a boost to the country’s depleting foreign currency reserves. However, the target for foreign exchange reserves was not met.

Though the terms and conditions of upcoming amnesty schemes had been decided, the newly-appointed Adviser to the Prime Minister on Finance, Revenue and Economic Affairs, Dr Abdul Hafeez Shaikh, has asked for further simplifying the scheme.

To proceed in the right direction, the most important thing that the new finance minister should go for is to trace the sources of black money. Merely seizing the assets while leaving the main sources which generate black money will not take us anywhere and the criminal act will keep on thriving.

Conclusively, necessary measures must be made to make the FBR and all other tax-collection bodies as effective as possible. We can never achieve our target from amnesty schemes unless we make sure that using best practices, the FBR will take care of all tax evaders without any discrimination. Last but not the least, it is believed that a significant amount of black money flies out of the country so that it cannot be raided. Therefore, a system needs to be put in place so that checks and balances can be maintained over the flow of money to foreign countries.

Published in The Express Tribune, April 28th, 2019.

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