Traders’ tax amnesty: Facts and future challenges

Ayub Khan’s amnesty scheme succeeded as 7pc revenue contributed to GDP and 71,289 persons brought into tax net; out of 3.5m traders, only 135,000 in tax net; tax on banking transactions likely to increase up to one percent after grace period

ISLAMABAD: A budding entrepreneur of a leading business family in Pakistan popped up on the radar of American tax authorities in 2008 to invest 23 million dollars in the real estate of New York.

Upon questioning about his funding source, he said the money was brought from Pakistan. The investigators subsequently wrote to Federal Board of Revenue inquiring whether the transferred funds were taxed in Pakistan or not.

An amnesty scheme of the PPP government was in the offing by the time allowing rich Pakistanis to whiten black money by paying only two percent taxes. It could generate only Rs2.8 billion; of this amount, Rs40 million was contributed by the scion of the rich family facing the inquiry in America.

The FBR, instead of using this opportunity to recover the due amount of tax, wrote to its counterpart in the US that the money was taxed in Pakistan without mentioning that the person under question was the beneficiary of an amnesty scheme and had not paid a penny before, revealed an official privy to details.

Here questions arise about the efficacy of amnesty schemes and whether the latest move by the PML-N government for luring traders into the tax net through yet another amnesty will be beneficial in the absence of FBR reforms.

To answer these questions, a brief review of the past schemes will be instructive. If the history of tax amnesty schemes in Pakistan is any guide, only the one offered in 1958 had turned out to be productive.

Being a maiden initiative and announced by the first-ever military ruler Ayub Khan, it succeeded in inspiring fear among the public contributing seven percent revenue to the GDP, the doctoral research of Shoaib Suddle, former Federal Tax Ombudsman, had found. (As many as 71,289 individuals were then enrolled in the tax net, according to FBR data.)

The second amnesty granted by Gen Yahya Khan in 1969’s revenue contribution to the GDP was only 1.52 percent and 19,600 persons were brought into the tax net. The third was offered by Zulfikar Ali Bhutto that collected revenue of 2.2 percent of GDP. The fourth scheme was during Gen Zia’s regime in 1986 that contributed not more than of the 1976 amnesty, Dr Suddle’s research completed in 1986 indicates.

That followed an amnesty by the PML-N government in 1997. Although no analysis in terms of the revenue contribution to the GDP is available, yet this money-whitening package generated a meagre sum of Rs141 million tax revenue. Genindividuals into the net and revenue around Rs103 billion.

A collection of Rs2.8 billion through amnesty scheme of 2008 by PPP government has also been mentioned.As far as the recently announced amnesty is concerned, it is not general in nature but only traders’ specific. A lot has been written in the newspapers and debated in talk shows about it.

That it will disillusion the honest taxpayers is a predominant argument being advanced. There is no second opinion about this contention but whether we have an honest taxpayer or not should be the foremost question.

Other than salaried class that can’t avoid paying tax and the compulsory indirect tax, there is hardly any Pakistani claiming to be honest taxpayer. This correspondent has asked the same question over a time to serving and retired FBR officials in search of an honest taxpayer but failed to find any.

Also the fact remains that the rich are granted amnesty in different forms and one of such was announced during budget of 2015-16 declaring tax exemptions to industry in Khyber Pakhtunkhwa for five years.

The amnesty for traders can’t be better described than a carrot and stick policy. The government first imposed withholding tax of 0.6 percent tax on the banking transactions of non-filers and then reduced it to 0.3 percent by bringing traders to the negotiation table.

Official figures have found 3.5 million traders throughout Pakistan and only 135,000 are in the tax net. Trading sector constitutes around 19 percent of the GDP but traders’ tax contribution is only 0.05 percent meaning thereby they are virtually out of tax net. Same goes with agriculture sector that forms 21 percent of the GDP but zero tax contribution.

Bringing traders to tax net will be a major achievement of the PML-N government as they are the ruling party’s constituency and deadlock is not affordable politically and financially. The scheme has been announced with a modest expectation of enrolling one million traders.

The optimism is not out-rightly misplaced. A refusal to enrolment under this amnesty means an escalating business cost in form of withholding tax of 0.6 percent at each transaction of Rs50,000. That will follow notices from the FBR on the basis of banking data and any protest by non-availing traders attracting no attention. This tax on banking transaction is likely to increase further up to one percent after the grace period of benefiting from amnesty is over.

While opposition parties are dismissive of this policy, including PTI leader Imran Khan, Asad Umar is supportive of it and firmly believes that the energy should be directed towards its improvement instead of politicising it.

However, his major objection during conversation with ‘The News’ was on levying mere one percent tax for whitening the business capital by traders. The missing point in his argument is that the tax rate of one percent has been fixed keeping in view all-weather amnesty granted through section 111 (4) of Income Tax Ordinance that bars the FBR from questioning foreign remittances.

Majority of the businessmen in Pakistan have been routinely sending money through different channels abroad and bringing it back in shape of foreign remittances with only two percent tax on banking transaction.‘The News’ have already highlighted it in a story entitle ‘Money laundering flourishes under the garb of remittances’ basing report on some case studies where billions have been recycled through this channel.

Thus enhancing tax rate for traders under this scheme means defeating the purpose of amnesty as they are likely to whiten money through other channels and remain undocumented. Instead of questioning one percent tax rate, amendment in tax law should be demanded for empowering tax officials to question the source of remittance.

Presently, a political appointee in the FBR is under NAB inquiry for receiving Rs700 million through remittances but is reluctant to disclose who sent the remittances.Another point in the scheme worth highlighting is the clause relating wealth statement. Under the present scheme, any trader declaring income less than one million rupees don’t have to declare assets that will likely to encourage mis-declaration by traders.

This preferential treatment to the traders unlike other taxpayers who have to declare assets no matter the declared income is less than one million, should be abolished.

Other issues meriting consideration are the reforms of tax administration. What if traders are brought into the tax net but the FBR is not capacitated enough to ensure due recovery from them.

While the government is bent on bringing them into the net, a matching number of rich individuals discovered by Nadra have gone unaccounted by the FBR since there are many influential figures enlisted.

A study by Nadra in 2012 found 3.5 million rich Pakistanis who frequently travel abroad, live in posh areas, operate multiple banks accounts with more than one vehicles registered in their names but are out of tax net.

Instead of training guns at the government for this scheme, the media, civil society and parliamentary opposition should focus on making this a successful attempt through demanding reforms in tax administration that include its autonomy having tenure-protected chairman who could perform duty diligently and independently in absence of any political pressure.

Less than that, business will remain as usual. No amount of reform commissions will help without implementation of recommendations. Like amnesty scheme, many commissions have been set up before. The commission formed by the PML-N government is not the first one.