Yet another tax amnesty scheme has been announced and this time too by Prime Minister Nawaz Sharif though few had any doubts about precisely who the real architect was: Federal Finance Minister Ishaq Dar.
Tax amnesty schemes should be one-offs to be effective but in Pakistan they are announced with disturbing regularity. And what is even more disturbing about the 2016 scheme is the fact that this is the second time around during its ongoing tenure that the Dar-led economic team announced an amnesty - the first was in 2013 and was mislabelled as the Prime Minister's investment incentive scheme which envisaged (i) granting immunity from routine audit for current filers if they paid 25 percent more income tax than the previous year and (ii) for non-filers immunity from routine audit, penalties and interests provided that they registered and filed missing returns for the past five years as well as paid 25000 rupees per year. Data reveals that only 4000 new filers were added through this scheme.
The International Monetary Fund (IMF) in its second mandatory review dated March 2014 under the 6.64 billion dollars Extended Fund Facility that is scheduled to end by the fourth quarter of the current calendar year expressed reservations on the package: "the package seeks to improve the investment climate through reducing tax scrutiny. The package opens another loophole in the system in addition to the ones that already exist for remittances and equity stock investment, and raises potential money laundering risks. The immunity from routine audit hinders the self-assessment process, and the amnesty-entailed by waiving penalties and interests-is likely to be detrimental to improving compliance and collections as tax payers will develop an expectation of future immunities." Sad but the tax payers' expectation of future immunities has come true with the 2016 amnesty scheme.
The second IMF review further maintained that "the authorities consider this scheme as one-off, and will refrain from issuing another amnesty during the program period. The immunity from routine audit does not extend to cases where non-compliance is detected from other sources." It is no wonder that the Finance Minister and officials of the Federal Board of Revenue (FBR) are perhaps unique in refusing to label the 2016 tax amnesty scheme as such. The basic objective of the latest scheme is to generate revenue for the government.
Unfortunately, the economic team, as has become the norm, has over-estimated the success of this revenue measure and reports indicate that around 100 billion rupees from this scheme is expected and 5 million new filers - a number which was halved to 2.5 million filers and further reduced to one million - a reduced number that analysts maintain is far too optimistic. Be that as it may, even half a million would be a step in the right direction though it must be accepted that the frequency of such amnesty schemes diminish their success rates. The success or otherwise of this scheme remains to be seen and the traders who applauded the Prime Minister during his announcement of the scheme may not represent the majority as a section of traders in Lahore refused to accept it a day later.
The 2016 scheme is titled voluntary tax filing scheme; it was announced by the Prime Minister while the Finance Minister tabled Income Tax (Amendment bill) 2016 the same day in the national assembly. So what reservations if any can one expect economists and the Fund team to lodge with respect to this latest amnesty scheme?
The scheme offers filers three options, whichever is higher, that would make them eligible for no audit for the next four years:: (i) 25% more than tax paid for tax year 2014 or for latest tax year for which return has been filed on the basis of taxable income; (ii) turnover based tax at rates specified; or (iii) 30,000 rupees lump sum. For non-filers the options are: (i) legalise working capital up to 50 million rupees in tax year 2015 on payment of one percent tax on working capital on profits and gains from the trade activity; (ii) for tax year 2016 tax based on turnover at specified rates provided turnover is three times the working capital declared for 2015; and (iii) tax year 2017 and 2018 tax based on turnover at specified rates provided tax paid is at least 25 percent more than tax paid in 2016. And if they still refuse to file their returns then the 0.6 percent tax on all banking transactions would apply. Unfortunately though post-budget announcement of the tax on all banking transactions led to a decline in deposits with traders opting for cash transactions.
There are six major flaws in tax amnesty scheme 2016. First, two amnesty schemes in two and a half years during the tenure of the same Finance Minister reinforce the Fund's 2014 concern namely that the scheme is likely to prove detrimental to improving compliance and collections as tax payers will almost certainly develop an expectation of future immunities. Or why would non-filers be tempted to file returns when the likelihood of a cash-strapped government, due to its sustained failure to either reduce current expenditure or indeed to reform the tax structure, announcing yet another scheme remains high. Second, the scheme is traders' specific (for filers and non filers alike and disturbingly more attractive for existing filers than for existing non filers) which is patently discriminatory for non-filers operating in other sectors. Third, like our tax system the scheme is highly regressive with a trader with a higher turnover paying 0.1 percent tax (plus 400,000 rupees) while a trader with turnover of less than 50 million rupees would pay 0.2 percent tax. Fourth, to claim that the scheme is designed to bring small traders into the net is not credible as 250 million rupees turnover does not constitute a small trader. Fifth, the scheme extends beyond the current tenure of the government and as such is flawed. Sixth, the government's claim that it is granting amnesty for 2015 onwards and not for past black money is flawed given that the turnover of a trader is based on past income.
To conclude the government's objective to broaden the tax base must be appreciated but amnesty schemes have not worked in the past and are unlikely to in the future. There is a need to improve the audit capacity of the FBR as well as improve its governance enabling its staff to begin the painstaking task of registering all businesses street by street, district by district, and province by province and, at the same time, there must be zero tolerance for corruption within FBR. Unfortunately, instead of reforming the FBR, the Finance Minister is increasing reliance on withholding agents and amnesty schemes designed for voluntary filing.