With the announcement of the latest prime minister’s tax amnesty scheme, the Pakistan Muslim League-Nawaz (PML-N) has achieved the distinction of being the only ruling party in the county’s history to promulgate four tax amnesty schemes — three during the current tenure, 2013, 2016 and 2018, and one in 1997.
There are two major differences between this amnesty scheme and the previous ones: First, while the previous three schemes announced by the PML-N government dealt with assets held within the country, this is the first scheme that deals with assets held abroad by Pakistani nationals. Second, the latest tax scheme is meant to widen the tax base.
Clearly, like all the previous four amnesty schemes promulgated by the PML-N, this one too is focused on appeasing its constituency. The structural reforms proposed aim at appeasing the salaried voter of the PML-N by increasing the ceiling of taxable income, “They have tried to increase the number of taxpayers in the tax net by increasing the ceiling of taxable income,” says Sajid Amin Javed, a Islamabad-based researcher on tax systems in Pakistan who is associated with Sustainable Development Policy Institute (SDPI). “Previously a salary of Rs50,000 a month was exempted from tax. Now this figure has been enhanced to Rs100,000.”
Experts assess that this reform will decrease the revenue by Rs100 to 150 billion. “This is intended to make the salaried middle-class happy in order to protect the PML-N’s middle class constituency,” says Javed. “However, the revenue collection will not exceed Rs30 to 35 billion.” The estimated target government has set for the scheme to achieve is more than $5billion.
In 2013, the PML-N government promulgated a tax amnesty scheme for imported vehicles brought into Pakistan without payment of due taxes. According to FBR records, the government lost Rs35 billion. This consolidated the party’s middle and upper-middle class constituency. Similarly, the tax amnesty schemes of 1997 and 2016 pleased the small traders as they were offered tax exemptions. Traders were offered exemption from mandatory taxes as part of an understanding reached between the government and traders in the talks between the two sides.
Available figures suggest trader-specific tax amnesty scheme of 1997 and 2016 announced by the Muslim League government failed to produce any tangible results. According to Javed, the 1997 scheme generated only Rs141 million. The much-hyped tax amnesty scheme announced in February 2016, aimed at documenting the informal retail sector, had to be rolled back due to a lukewarm response from the trader community. Only 9,020 traders opted for the scheme and contributed a meagre Rs850m.
Sajid Amin Javed says the 2008 scheme announced by the PPP generated the maximum amount of revenue — at Rs2.8 billion.
Salman Shah, former economic advisor to Musharraf, says, “It’ll be interesting to see the kind of people who actually benefit from it. There are all kinds of people who are not paying taxes — businessmen, drug dealers, terrorists etc. The government will want only the first type to avail this opportunity; otherwise there is a chance we will get into trouble with FATF.”
Traders of big urban centres are a loyal constituency of the ruling party since 1993. They finance the political activities of the ruling party at local levels.
The point is that the government’s words should be credible. If the tax evaders know that another tax amnesty schemes will soon follow, s/he would not take the one offered seriously. For instance, the PPP government announced in the parliament while promulgating the 2008 amnesty schemes that there will be no more amnesty schemes, but within five years, in 2013, the next government of PML-N presented another amnesty scheme, giving out the message that many more will follow and no punitive action would be taken.
Former tax ombudsman, Shoaib Suddle, stated in a report, “The second amnesty granted by Gen. Yahya Khan in 1969’s revenue contribution to the GDP was only 1.52 per cent and 19,600 persons were brought into the tax net. The third was offered by Zulfikar Ali Bhutto that collected revenue of 2.2 per cent of GDP. The fourth scheme was during Gen Zia’s regime in 1986 that contributed not more than of the 1976 amnesty”.
Successful tax amnesty schemes are a combination of carrot and stick. But, in Pakistan’s case, incentives do not match threat from the state. Javed adds one of the basic reasons of failure of these amnesty schemes is that they are politically motivated and not economy reform agendas. “Countries like Indonesia, where tax amnesty schemes have achieved immense successes is because they inculcate a fear among tax evaders of being caught. Here, a tax evader gets away without fear,” he says. “These schemes do not ensure structural follow up and punitive action.”
There is a penalty involved in this tax amnesty scheme which was not there in the previous schemes announced by the PML-N government. “In this scheme there is a provision that if you file an assessment of your property, which is less than that of the market value, the government will have the authority to forcefully purchase your property with double the amount of your valuation,” explains Javed.
But this threat, he says, is not credible because of two reasons, “Firstly, the government cannot forcibly purchase property as this is against the fundamental rights ascribed in the constitution. Secondly, the government doesn’t have the administrative capacity to identify and do the valuation of the property to implement this threat.”
All the four schemes announced by the PML-N government were promulgated through an executive order, which experts say, make them less credible in the eyes of the public than an act of the parliament.
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The tax surveillance is considered essential for the functioning of a tax system anywhere in the world. In western countries the government has to press a single button to know all the financial transactions a citizen has carried out and the amount of tax paid, making it easy for the system to note the discrepancies and take action. Now the government will be passing a law to make the ID card number, National tax Number of a tax payer, which is a first step towards starting a tax surveillance system.