Another tax amnesty

The PML-N government is hoping the third time is the charm for its various tax amnesty schemes. After their income tax amnesty in 2013 failed to bring the ultra-wealthy to declare their income and the traders’ tax amnesty the same year was only availed by about 3000 traders, it is now trying to raise money by allowing property owners to pay a nominal amount to whiten money in the real-estate sector. This plan, too, is likely to be dead on arrival. Now that the president has signed the Income Tax Amendment Act 2016 passed by the National Assembly last month, people can declare black money invested in real estate by paying a nominal three percent tax. The highest property tax rate in the country is 35 percent with an additional 100 percent tax levied as a penalty in case of late payment. As with all amnesty schemes, the massive discount is offered in the hope that it will induce people to declare their wealth and pay the actual tax rate in the future. This is once again unlikely to happen since no one believes the government will follow through with enforcement against those who do not declare their property. The carrot of amnesty schemes can only work if the government has a stick with which to force compliance. History shows that enforcement has always been lacking.

As it stands, the amnesty scheme is basically a handout to the real-estate sector. It allows property to be declared without even asking the property owner the source of the money that was used to purchase the land. So, even if the amnesty scheme receives a large response, the government still will not know where the money originated and will not be able to trace the source of the money to tax it in the future or ascertain if it was earned through illegal means. There are also no punitive penalties on those who continue to evade real estate taxes. On top of that, the scheme is open-ended rather than setting strict deadlines for compliance. To make matters even worse, the tax will be paid on the difference between the new FBR rate on properties and the rate set by district commissioners, both of which are far lower than the actual market value of properties. Were the government serious about cracking down on the unregulated and untaxed property market, it would go after the entire black market in property rather than offering an amnesty. Right now, this entire plan looks like a way to raise some quick money so the FBR can make up its Rs 100 billion shortfall. What it will not do is bring some much-needed transparency to the real-estate sector.