As some reports in the press, suggest the government is considering announcing an amnesty scheme in the forthcoming budget for fiscal year 2007-08 that would legalise black money economy on payment of 2.5 to 3 percent of the value of the undeclared assets. The scheme would make it mandatory for the new taxpayer, a euphemism for someone hitherto operating within the illegal economy, to file income tax returns for at least five years.
The objective of this scheme is fairly well understood in this country, given that this is not the first time it has been launched nor is it likely to be the last: a severely resources constrained exchequer is unable to raise taxes for political reasons as well as economic ones - the former related to pressure groups, including sections of the textile sector which have resisted attempts by successive governments to bring them into the tax regime, and the latter related to a declining growth rate, (the recently held National Economic Council was informed that the growth rate for the ongoing fiscal year was revised downward from 7.2 percent to 5.8 percent) which limits revenue collection automatically.
Analysts argue that the schemes designed to whiten black money reflect a myopic approach to the resource constraint problem as it not only provides an instrument to whiten money in the future but also leads many an honest tax payer see the amnesty as providing an 'unfair' advantage to the black money hoarders.
The critical question, however, is to identify those with black money. According to Hernando de Soto, an economist who has done much work on the illegal or parallel economy operating in Third World countries, the illegal economy is an outcome of the heavy regulations that governments routinely indulge in.
Thus a man operating a stall outside a cinema theatre or a lucrative tea shop will not register in the legal economy simply because the red-tapism involved coupled with the real possibility of corruption is a major deterrent.
Pakistan's black economy is fairly large, upto 50 percent of the legal economy according to some sources, yet few think that this consists of those who sell their wares in makeshift stalls along the side walks of our major cities. There appears to be a consensus that the generators of black money are those involved in the narcotics trade, corruption, smugglers and tax evaders generally.
Those involved in corruption and/or tax evasion have been taken care of largely through the National Reconciliation Ordinance (NRO) in recent months and there is little likelihood that any major revenue will be earned from this source. However, those involved in the narcotics trade as well as tax evaders must be dealt with appropriately and not through granting yet another amnesty.
It may be recalled that President Musharraf also offered what he termed, during the early years of his rule, as a one time amnesty scheme. This was a naïve promise as each new government has the right to revisit any policy decision taken by its predecessor. Be that as it may, it is relevant to note that the way forward must be through rationalisation of the tax structure and ending the culture of tax evasion.
That there is tremendous potential to raise taxes is evident from Pakistan's abysmally low tax: Gross Domestic Product ratio: from 9.6 percent in 1993-94 to 9 percent in 2004-05. Comparable figures for other countries in the region are: India over 15, Sri Lanka near 16, and Turkey 32.3 percent. Pakistan needs to bring the ratio to double digits for starters.
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