The Voluntary Tax Compliance Scheme (VTCS) announced by the government is being termed by the tax bar associations of the country as flawed step and the Senate's standing committee on finance has described it as a 'non-starter'. The need for this scheme arose because of the 0.6 percent transaction tax imposed on all bank transactions of non-filers of income tax returns in the finance act 2015. Although, the number of people that ought to, yet do not file tax returns is outrageously massive, the traders, more precisely the retailers/shopkeepers of Lahore, the political base of the Sharif brothers, agitated and led the protest against this levy. This invoked the mover and shaker of the PML-N government, the go getter chief minister of Punjab, Mian Shahbaz Sharif, to enter the fray. This scheme is, therefore, the result of the intense and persistent efforts of the Punjab chief minister to successfully persuade the Federal Board of Revenue (FBR) to devise a way to resolve this issue before it spins out of control.
Much against its will and weary of failure of all such previous schemes to curb evasion or widen the tax net, the FBR has contrived the VTCS. Finance minister Ishaq Dar is on record, when in 2012 he opposed any amnesty scheme for tax evaders on the floor of the parliament. In fact, since then he has repeatedly averred his opposition to any blanket scheme that would protect and whiten tax evaded assets and funds. Therefore, the FBR had to craft a scheme that would address the finance minister's aversion and yet give a sop to the protesting traders/shopkeepers who carry clout with the PML-N hierarchy. While the finance minister's concern of not offering a money whitening scheme has been fully addressed but the VTCS suffers from flaws and pitfalls that may not attract the intended beneficiaries to avail it and those that are naïve to do so may end up implicating themselves.
What is on offer is to whiten the working capital of traders by paying a token amount in tax with the condition that they would pay 25 percent more tax in each subsequent year for two years. Is it a realistic assumption that each year the turnover would increase in a way so as to yield a 25 percent higher tax? Furthermore, the power of the commissioner of direct taxes to reopen past cases, in the event of any information that he receives with regard to tax evaded assets (section 122 of the Income Tax Ordnance), has been retained in the VTCS. This, in our opinion, is the monkey spanner in the works as assets declaration is not covered under the scheme. No sane trader who has not filed or under filed tax returns and has also in the process acquired or built assets can afford to avail the VTCS.
It is apparent that the FBR did not interact with tax bar associations while formulating this highly controversial scheme. It is also quite obvious that the FBR is not unaware of the repercussions of keeping section 122 of the Income Tax Ordnance operational for this scheme. It appears that the FBR has devised this scheme in deference to the wishes of the PML-N hierarchy and gone through the motions of having come up with a scheme without regard to its success or failure. Everyday there is criticism of one or more aspects of this scheme and a government functionary or an FBR official providing explanation to points of criticism. Why can the FBR not develop a complete and proper narrative explaining not only the salient features, that it has already done, but also all the related aspects such as sales tax liability, the rationale for assuming a 25 percent increase in profitability for demanding a similar increase in tax in the subsequent year and also the effects the inclusion of section 122 of the Income Tax Ordinance in the VTCS would have on the person availing the scheme. What advantage would a trader have in availing this scheme just for the sake of legitimizing his working capital/stock-in-trade and would he be risking jeopardising his other assets that may be exposed?
We are fully cognisant of the limitations and compulsions that are there on the government - not only because of the fact that the country is under an IMF programme but also because of all the negative connotations and optics associated with a blanket amnesty. Such amnesties given in the past have not yielded the intended results and there is no reason why the new one would. We also commend the government, particularly finance minister Ishaq Dar, for remaining steadfast against the pressure for withdrawal of 0.6 percent bank transaction levy on non-filers. We have an abiding belief that all incomes must be taxed and every citizen must pay his due to the state. We also recognise and endorse the government's power to discriminate between classes of persons for purposes of taxation to encourage or discourage economic activity in a particular area or sphere. Disapproval of the VTCS, however, stems from the fact that the government has not offered this scheme to businesses across the board with a view to enabling all businesspeople to whiten their working capital within the bounds of the scheme as announced. And finally, a word of caution: the government should be careful in the matter of the VTCS that targets the small traders who do not have the competence or the resources to engage in lengthy litigations and are liable to be exploited by the unscrupulous in the tax machinery for lining their pockets. Thus, the VTCS cannot afford to have ambiguities which are the hallmark of FBR-related issues.
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