Black money in Pakistan is a parallel economy. We can not think of Pakistan economy without black money. Taxation policies of the government in the last 50 years, coupled with the greed of Pakistani businessman and corruption, have been solely responsible for creation of black money in Pakistan.
It is probably only in Pakistan that a person earning millions may not be paying any tax whereas a person earning fixed income of only one or two lakh ends up paying some thousand in taxes.
Income Tax Ordinance of Pakistan is one of the most complicated pieces of legislation in the world and has been largely, if not solely, responsible for making Pakistan a corrupt nation. On the pretext of simplifying the tax laws, the successive governments of Pakistan have rather complicated these laws.
Most of the times even the tax experts fail to interpret the tax laws in right perspective and as a result thousands of law suits are pending with the courts and tribunals only on the issue of interpretation of various provisions of tax laws or amendments.
How to put an end to black money? How to do that? After in depth studies of Pakistan tax system, mental attitude of Pakistani public, tax system in other countries, it can be concluded that:
1. Pakistani tax system provides for incentives to tax evaders.
2. No social stigmas are attached to tax evaders, if caught. Rather it is becoming a status symbol to have tonnes of black money.
3. Black money helps in exploiting the system, securing jobs, getting admissions, payment of underhand commissions and bribes, hoarding, winning elections, purchase and sale of elected representatives like MPA's and MNA's.
4. It also helps in evasion of payment of excise duties, sales tax, indirect taxes like stamp duty on purchase of property and as a result in evading capital gains tax.
5. No tax need be paid on income generated from black money. So it is a vicious circle, black money creates more black money.
All the amnesty schemes of successive governments to eradicate black money have failed to achieve any concrete results. Lockers, overseas accounts and cupboards of businessmen, politicians and bureaucrats are overflowing with black money due to lack of willingness on the part of government to put an end to the black money.
Rather it can be alleged that tax policies of the government directly and indirectly helped these people in creation of black money, whereas the common man or honest taxpayer watched helplessly and they also became dishonest at the first available opportunity.
Even if today, Pakistan wants to be called Honest Pakistan and we want to be a super power, the very first thing we have to do is to eradicate black money from the system. The system should be evolved in such a way that black money gets eradicated on its own and the cost of keeping black money becomes greater than the benefit accruing from keeping it.
Sincere implementation of the steps suggested in the following paragraphs will surely result in eradication of black money and its ill-effects.
Taxation system should be rationalised, simplified and made people friendly. It should be such that tax is paid without a pinch of salt. No surcharges are levied at all or at any stage. Double taxation in the grab of any rational should be firmly avoided.
The government spending should generate public approval, it should convince the tax paying public, that their hard earned money is being properly utilised for the general public welfare and not for the benefit of a handful politicians and public servants. Wasteful expenditure must be avoided.
There should be an incentive to pay tax; some assurances against future contingencies will definitely encourage the tax-payer to pay the right amount of tax.
Similarly there should be strong disincentive for not paying the correct taxes.
INCOME TAX:
Maximum marginal rates of tax should be fixed @20% both for individual and corporate assesses. No surcharge or cess is levied at all, in any form. In case of individuals, Nil tax slab be provided for an income up to Rs 200000/- and @10% for an income from Rs 20000/- to Rs 500000/-. Lower tax rates will ensure better compliance. Tax collections will certainly go up and most of the black money will get introduced for commercial and industrial use. Just imagine billions being pumped into the economy.
Income of partnership firms should be taxed only in the hands of partners. It is not at all justified to tax the income of firm; rather whole of the income of the firm should be allowed to be allocated amongst partners and then taxed in their respective hands.
Along with tax returns, every individual assesses should be required to file a statement of his assets and liabilities as on 30th June of the tax year, including assets owned by his spouse, minor and dependant children, showing actual cost, mode and date of acquisition of each immovable property. This single measure will be enough for eradication of black money to a large extent.
No deductions should be allowed, except for savings of up to Rs 200000/- per family.
Dividend income should be taxable in the hands of recipient. Dividend withholding tax should be done away with. Rather imputed credits should be allowed just like TDS in the hands of the recipient of dividend against actual income tax paid by a company.
In case any company does not pay any tax in spite of income due to various deductions, incentives or exemptions, no imputed credits shall be allowed. In nutshell imputed credits should be allowed only against the actual tax paid by such companies.
Depreciation to be provided in the books of account under the Companies Ordinance, should be the same as provided under the Income Tax Ordinance, on written down value (WDV) basis. Companies should be allowed to adjust their schedules of fixed assets during the transition period, to bring the same as per Income Tax Act, so that book results of the companies are in agreement with the taxable profits, by and large and thus present a true and fair state of affairs of the company. The rates of depreciation under the Income Tax Ordinance should be rationalised on realistic basis.
CASH TRANSACTIONS:
All expenses including capital expenditure beyond Rs 10,000 should be through banking system, ie by cheques or credit cards etc. Cash expenditure in excess of Rs 10000, including capital expenditure, should be disallowed and taxed @20%.
Payment to creditors in cash should be disallowed if it is in excess of say Rs 50000 in a year to a single party.
In view of the improved banking facilities in Pakistan and advent of ATMs, debit and credit cards, direct debits, direct credits, internet banking, online bill payments, no family, should be allowed to keep cash in excess of Rs 200000/, if cash in excess of Rs 200000/- is found in any locker, premises, vehicle, vessel or in possession of any person, it should be treated as his income and taxed @20% flat on the spot plus penalties and prosecution if such person fails to justify and explain the source of such money.
In case of business assesses like firms and companies this limit be allowed say up to Rs 500000/- but within the business premises only. Now with the improvement in banking system in Pakistan and online banking being a reality, cash transactions should be restricted rather abolished in a phased manner. All purchases, including durable assets, if made through banking, will get automatically accounted for.
In addition to crossed cheques or drafts, online bank transfers, payments by debit or credit cards should be allowed under the Income Tax Ordinance. The banks should be directed to issue debit cards to all account holders for online payments.
This will result in cash less transactions like developed countries. And thus there will be no need to possess any cash except for petty needs. All business entities, whether small or large should get debit machines installed to accept payment by debit or credit cards.
PROPERTY TRANSACTIONS:
Every Pakistan knows that almost all property transactions carry 50% to 75% black money component. This single factor has contributed to generation and utilisation of black money in Pakistan, to a large extent, peculiar to our country only.
To get rid of this malaise, a very simple, non-controversial and effective method is suggested here, which can be immediately implemented.
No sale agreement for sale or purchase of any immovable property in Pakistan should be a valid agreement, till it is registered with the Registrar or Sub Registrar of the area, where such property is situated.
Such registering authority should maintain a date wise register of such sale agreements, showing particulars of seller, purchaser, description of property, sale consideration and last date of payment etc.
Any agreement of sale not registered with the registering authority, shall be a void transaction, not enforceable at law. Agreement can be on a non-judicial stamp paper of Rs 100/- throughout Pakistan and stamp duty be paid only at the time of execution of sale deed.
Payment of advance or sales consideration in cash shall not be a valid mode of payment. This step will ensure eradication of black money in real estate transactions and property prices will tend to stabilise.
Power of attorneys in respect of immovable properties, containing powers to sell, mortgage, gift or lease of properties, including transfer of lease rights in respect of leasehold properties shall be valid only if given to blood relations and not otherwise.
All such attorneys already given before the date of such notification, to other than blood relations should cease to be enforceable after the expiry of one year from the date of such notification. This step will take care of all the benami transactions in real estate and evasion of stamp duty. To take care of genuine purchasers of lease hold properties, lease hold rights should be made transferable under the Transfer of Properties Act.
INCENTIVES TO TAX PAYER:
In Pakistan the Income Tax Department is partner in profits only and that too to the extent of almost one third of profits. In case of any eventuality or loss the department looks away, rather doubts the tax payer. People in Pakistan are always worried about the security of their future earnings, in case of any tragedy or failure of business, there should be some assurance like social security by the government.
A person, who has been paying Income Tax on his earnings throughout his life, should be assured of being taken care of by the Tax Department. To take care of this aspect, it is suggested that the Income Tax Department enters into some arrangement with any insurance company that in case of death or permanent disability of the tax payer, the insurance company shall pay to such person or his spouse a monthly pension calculated on the basis of equivalent to 70% of the average income of last five years tax returns.
This average income should be based on income under the head salaries, business and profession or other regular sources of income, the income from which stops due to death of such person. From this calculation deductions should be made for any pensions or ex gratia payments receivable from employers of such employees. The insurance company should pay such monthly pension to such person till his death or death of his or her spouse.
In case of failure of business some sort of loss of profits policies can be worked out by the insurance companies. Or alternatively in case of death or permanent disability the insurance company can pay in lump sum the equivalent of the total actual tax by such person in the last ten years. Needless to say such a payment shall be tax free in the hands of recipient.
The income tax department can pay some percentage of tax collected as insurance premium to such insurance company, just like group insurance schemes. Such a step will be a great incentive for any one to pay maximum tax.
The persons paying income tax of Rs one lakh or more per year should be entitled to preferential treatment like senior citizens, at health institutions, due respect at police stations, entitlement to automatic bail in case of matters except serious criminal offences, appointment on various advisory bodies or industrial and business bodies of the government.
Respectful treatment by officers of the tax department.
Such citizens should be invited by tax department to its seminars and public meetings and highest tax payers should be honoured. Such steps will encourage the people to pay more tax.
INDIRECT TAXES:
There should be only one tax namely Goods and services Tax called GST or VAT, all transactions of sale and purchase and services should be covered under GST/VAT regime. There should be no exclusion under any category and should include agriculture produce and inputs also. Only one rate of GST @10% should be fixed for all types of goods and services, on the pattern of VAT. All other levies under whatever name, like excise duty, market fees, octroi, service tax, custom duty, local taxes etc.
should be abolished in one go. GST paid on purchases or inputs should be allowed to be deducted from GST paid or payable on sale. If GST paid on inputs is in excess of GST payable on sales in a particular month or quarter, the same should be allowed to be carried over to next period. Even stamp duty on real estate can be replaced with GST.
All services under whatever name including consultancy, doctors, advocates, consultants, photographers, beauty clinics, property dealers, financial services, brokerage services, electricity, services by municipal corporations, communication services etc should be covered. Each and every item of sale, every product, under whatever category it may be, should be covered, no exclusions, no exceptions and no differential rates for any item.
It may be petrol, diesel, kerosene, life saving drugs, liquor, arms, luxury items, cars, cycles, ie any thing from pin to plane should be subject to GST @10%.
Every trader or service provider having turnover exceeding Rs 500000/- should be registered under GST and must issue a tax invoice. GST calculation should be automatic in the invoice. Anyone claiming GST on inputs or purchases, must do so only against tax invoices, in the absence of a tax invoice, he can not claim GST on inputs or purchases.
Such a practice will ensure that no sale or purchase shall take place anywhere in Pakistan without tax invoice, because if you want to claim GST on inputs or purchases for set off against GST payable on your sales or output, you must have a tax invoice. Therefore the question of making purchases without invoice will become a thing of past.
The government must abolish all other taxes, interstate taxes and duties, the sales tax and excise departments may be merged into one in a phased manner. Most of the staff of Excise Department can be transferred to income tax department or sales tax department. GST collections can be shared by provinces and centre on some agreed formula, acceptable to all the provinces.
This step will ensure simplification of indirect taxation and multiplicity of taxes shall be avoided. The total revenue collections will increase manifold and unaccounted sales and services will be a thing of past.
This practice of uniform GST has been successfully implemented in Australia, New Zealand and other developed countries like UK, USA and other European countries more or less on the pattern suggested. In such a system, the very idea of black money gets obsolete and corruption is also checked to some extent at least.
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