A shot in the dark

The deadlock between traders and the government over the tax on banking transactions has broken, mainly at the expense of the government. After weeks of speculation, Finance Minister Ishaq Dar tabled an amendment to the existing income tax legislation which will allow traders to whiten undeclared assets by paying a nominal tax. The features of the bill were presented by Prime Minister Nawaz Sharif at a gathering of the business community. The PM felt optimistic that the scheme could open up an era of collaboration between the Federal Board of Revenue and traders who have a reputation for not paying taxes as a group. The scheme itself proposes to allow traders to whiten undeclared working capital by paying one percent tax on the declared amount. Next year, the same traders will have to declare a turnover of at least three times the working capital. The four-year scheme hopes to document and tax the profit on turnover for traders by the end of the year 2018. Under the current laws, untaxed wealth must be taxed at 35 percent. The FBR has declared that the scheme will add over two million new taxpayers, a figure that is optimistic to say the least. Pakistan currently has only one million taxpayers out of a population of 200 million.

There is a simple incentive for the traders who opt for the scheme. Their income will not be audited for four years, and no questions will be asked about their source of income. This is tantamount to being given a clean chit for decades of tax avoidance. The lesson is clear: if you avoid paying tax long enough, the government will come up with an amnesty for you. This is the wrong message to send out. The scheme is clearly a measure for desperate times; one would imagine that most traders would read the signal and respond accordingly. This becomes obvious when we see that, while the government has laid out the carrot for traders clearly, it has not specified what the stick will be if they refuse to comply as a group or individually. The reality is that Pakistan’s tax apparatus lacks the capacity to monitor the real incomes of most economic groups. Further, it lacks the will and ability to force well-to-do economic groups to pay the relevant income tax. Heavily criticised by Transparency International as an NRO for tax avoiders, the scheme discourages those who duly file their taxes in the country. The tax amnesty scheme seems to be a shot in the dark. It sends the wrong message to dutiful tax filers while offering no guarantee that traders will actually be brought into the tax net.