A simple tax bailout

As mentioned in the last column [Tax bailout for economic revival, Business Recorder, April 17, 2020], all businesses-badly hit by lockdown in the wake of Covid-19 epidemic and due to sluggish economic activities, high utility bills and markup rate-are demanding a comprehensive bailout. They are critical of loan facility announced by State Bank of Pakistan to pay salaries/wages and demanding that it should be interest-free and/or grant to employees in lieu of lay-offs. Even after opening of businesses, they say, it will require many years to recoup losses and achieve break-even position. In this scenario, they ask, where would they pay markup from? This additional burden, according to them, is going to hamper business revival, rather a threat for survival. They are also demanding another tax amnesty, drastic tax cuts/waivers, especially reduction in the rate of sales tax to below 10%, and zero taxation for employees earning below fifty thousand per month, waiver of advance income tax and all withholding provisions contained in the Income Tax Ordinance, 2001.

Hopefully, the economic and tax managers of the coalition government of Pakistan Tehreek-i-Insaf (PTI) must be considering all these demands and soon come up with a tax-relief package. In fact, they should have done this much earlier as is the case in almost all the countries of the world. However, our policymakers always delay matters for reasons best known to them. If a package is not announced within next seven days, we will write specially about it summarizing the various tax relief and stimulus measures announced across the globe by governments to protect businesses and workers. In this article, we are presenting a simple bailout for all, those who have either never reported their taxable income or underreported it and are in possession of assets created out of these untaxed profits, or met expenditure out of the same.

By now it is well-established that even after giving about a dozen amnesties since 1958, we have failed to counter under-invoicing and misdeclarations, ensure correct reporting of sales and payment of sales tax due, ensuring correct declarations of incomes and/or reducing/eliminating tax evasion/avoidance through under-reporting and/or non-reporting and claiming inflated expenses. The PTI government needs to be reminded that one of the worst consequences of black money/tax evasion is their pernicious effect on the general moral fabric of society shattering the faith of the common person in the dignity of honest labour and virtuous living.

The question is: What is the solution? In these columns, we have already suggested it but unfortunately, the PTI government has failed to even take note of it, what to speak of implementing the same. In our solution, it was highlighted that there would be no issue from the Financial Action Task Force (FATF) as well as no objection from the International Monetary Fund (IMF) or World Bank under their 'Pakistan Raises Revenue' Project as it extends no protection to anybody, that in recent Tax Law (Amendment Ordinance, 2020, confined to merely public office holders (their spouse and dependents or name-lenders), in respect of proceeds of crime, action under the Money Laundering Act, 2020 will remain unaffected. It is simple and for all-thus no discrimination and no need for complicated legal provisions-the amnesty scheme announced for builders and developers though Tax Law (Amendment Ordinance, 2020 on April 19, 2020 is a nightmare, badly drafted and with so many ifs and buts, giving ample room to tax officials to harass genuine persons and accommodate the unscrupulous! This is their usual modus operandi that our politicians, unaware about the complexities of tax codes, would never be able to counter.

The government of PTI ignored all our proposals related to construction sector, now declared as industry, among others included long-term tax holiday and complete social security, including comprehensive health insurance. The suggestions were sent directly to the Prime Minister before the preparation of relief package and highlighted in these columns [Covid19-pandemic, leadership & apathy, Business Recorder, April 3, 2020 and When challenges offer opportunities, Business Recorder, March 27 & April 2, 2020] were either not brought to his notice or he was convinced by crafty bureaucrats: "Sir these are not worth-consideration."

The comprehensive proposal of long-term tax holiday with benefits to employees and those having plots but no source for construction, were highlighted in Incentive package for construction industry: Amnesty, tax breaks and multiple reliefs, Business Recorder, April 10, 2020. As expected, in Tax Law (Amendment Ordinance, 2020, the economic team of 'Prime Minister Revenuecracy' demonstrated a myopic outlook by just announcing some cosmetic concessions and another amnesty for whitening undeclared funds by big developers and builders-many call them the bigger mafia than one dominating the sugar industry.

Why should the construction industry be given a long-term tax holiday? The answer is simple. Even a medium sized project, what to speak of a mega one, cannot be completed in two years. Thus, in the long run, incentives/concessions/amnesty may enrich the few having monopoly in this business, but it is not going to promote the construction sector as a vibrant industry and resultantly the allied industries would not be able to reap the benefits conceived by policymakers.

In Covid19-pandemic, leadership & apathy, Business Recorder, April 3, 2020, published on the same day when announcement of package for construction industry was made but written a few days before, it was proposed that if the PTI Government "wants to avoid recession, overcome economic toll during and after the lockdown, it must announce a comprehensive relief plan for real estate, housing and construction sectors in totality that should be at least a 10-year tax holiday". It was also proposed that in view of the extraordinary circumstances and economic toll of lockdown in the wake of Covid-19 epidemic, the government must give across the board relief to all businesses. It was highlighted that income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, fixed tax, presumptive and minimum taxes have been added to distort the entire concept of personal income taxation.

It was emphasised that the present government has a golden opportunity to restructure the complicated and inefficient tax system and give meaningful and result-oriented tax bailout, incentivizing all businessmen to pay low-rate taxes to mitigate the impact of Coronavirus [Haq proposes 10% income tax rates for all entities and 20% for companies, Business Recorder, April 21, 2020]. It was earlier elaborated in a detailed study, Towards Flat, Low-rate, Broad and Predictable Taxes, published by PRIME Institute of Islamabad in, 2016.

The package, verbally announced on April 3, 2020 by Prime Minister, though promised immunity from probe in respect of investment, the Tax Law (Amendment Ordinance, 2020 created unworkable conditions. It has also failed to consider a 10-year tax holiday, so that all stakeholders could make investments and prepare long-term plans. The wizards of Ministry of Finance and FBR should be blamed as well as politicians who could not comprehend that the long-term tax relaxation for the real estate/housing/construction sectors was and still is beneficial as over 70 industries are linked to these sectors and Pakistan needs millions of houses every year.

The long-term tax holiday covering real estate, construction of all sorts, from housing to big dams, providing investors, the sellers and buyers 10% tax on undisclosed/underreported income [details in: Need for new income tax law-II, Business Recorder, March 18, 2020] can achieve the objectives of providing jobs to millions, avoid recession and revive economy. In Covid19-pandemic, leadership & apathy, Business Recorder, April 3, 2020, it was made clear to the economic and tax managers that it would be a win-win situation as "tax concessions to real estate, housing and construction sectors ultimately be set-off automatically by higher turnovers of industries allied with them, besides giving these capacity to retain employees and revival of industries hit by the lock-down and contraction in demand". Tax Law (Amendment Ordinance, 2020 lacking this perspective is thus an utter disappointment as it also ignores social protection and welfare of the workers/employees as a quid pro quo for relief to the giants operating in the construction industry and minting billions but never investing for cheap houses for the poorer segments of society. They are fond of posh societies that serve only the affluent and not even the middle class. The opportunity of having a meaningful package for real estate/construction industry that can boost the economy as a whole and give a better deal to the workers is lost. The remedy is still available by amending Tax Law (Amendment Ordinance, 2020 as suggested above and in earlier articles.

In the existing extraordinary and incomprehensible circumstances, what should be the meaningful tax bailout for all businesses to retain their employees when there is recession and revival is a big challenge? Is general amnesty for all the only solution? Will it serve any useful purpose for mitigating economic toll of Covid-19 epidemic? In the past, the country suffered losses of billions of rupees due to various tax amnesties that have been quantified and documented in 'Retrieving untaxed/ill-gotten assets, Business Recorder, February 21 & 26, 2020.

It is about time the PTI government ended the culture of appeasement-no more amnesties and immunities giving incentives to the dishonest and penalising the honest who have been paying taxes diligently at normal rates. It was proposed in 2016 that instead of amnesty we should go for 10% flat rate of tax [Towards Flat, Low-rate, Broad and Predictable Taxes, PRIME Institute, Islamabad]. Those who never filed a return (total non-reporting) or filed but understated should be offered to pay 10% of non-reported and under-reported income, as the case may be, and there will be no penal action/audit. A simple provision to this effect should be inserted in the Income Tax Ordinance 2001 through Presidential Ordinance but with a proviso that if declaration is not made till 31 December 2020, for concealment by way of non-reporting or under-reporting, all assets created or expenditure met out of untaxed/unexplained sources would be confiscated, and for expenditure, amount involved would be recovered, as well as prosecution for imprisonment would be initiated as per existing law. The Government may even consider bringing an Ordinance, as in the case of smuggling and hoarding, for confiscation of untaxed assets with rigorous imprisonment if lapse continues after the deadline.

It is a rare opportunity for the government to give incentives to all for bringing hidden assets on record by paying a low rate of 10% tax so that they can protect their existing businesses and have declared funds/assets for new investment in any arear of economy. Earlier, amnesties even at much lower rates failed as with carrot no stick was provided that is confiscation of assets and imprisonment under summary trial in case of perpetual default.

All citizens, resident or non-resident, should be offered a last chance to declare all untaxed incomes/expenditures and assets, as the case may be, for any past year, at home or abroad, by paying 10% and then incorporate the same in the wealth statement. Many will have cash liquidity problem so facility to pay in installments should also be given not as discretion but automatically under sub-section (4) of section 137 of Income tax Ordinance, 2001 and for lapse to pay and default surcharge sub-sections (5) & (6) of the said section to apply accordingly. This is simplest and meaningful tax-bailout the government can offer to all citizens in view of the crisis arising due to coronavirus outbreak and lockdown.

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)