Time for voluntary measures

Documentation of economy and increasing the number of taxpayers through the recently announced tax amnesty scheme has generated a mixed response among the stakeholders

Time for voluntary measures

Despite the high hopes pinned on the latest income tax amnesty scheme, opposition, independent economists and tax experts fear the scheme would face the same fate as the past schemes, and thus fail to achieve its targets of documentation of economy and increase in the number of taxpayers.

Repeated efforts of successive governments to bring maximum number of people into the tax net have quite often failed as majority of non-filers of tax are not motivated to file their returns because of lack of incentives. Currently, less than one million citizens file their tax returns out of the estimated 200 million population of the country.

According to estimates of the Research and Advocacy for the Advancement of Allied Reforms (RAFTAAR), an Islamabad-based alliance led by leading Pakistani research, public policy and communications experts, Pakistan’s tax-to-GDP ratio is among the lowest in the world at 9.4 per cent (2015). According to it, only 0.3 per cent population in Pakistan pays income tax.

Prime Minister Nawaz Sharif on the first day of the new year (2016) launched the "Voluntary Tax Compliance Scheme" for registration of non-filer traders who have been out of the tax net. This will be applicable for the tax year 2015. Finance Minister Ishaq Dar later introduced a bill to legalise this scheme in the National Assembly. Under this law, non-filers are defined as those traders who have not filed their income tax returns during the last 10 years. The Federal Board of Revenue (FBR) expects to bring around two million new tax payers into the tax net as a result of this scheme.

Opposition parties in the National Assembly have, however, rejected the new amnesty scheme by terming it "discriminatory and useless". However, the traders’ bodies have welcomed the scheme as this was actually announced at a meeting organised by the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) in Karachi.

The traders’ body, All Pakistan Anjuman-i-Tajiran, which was leading the agitation against the imposition of 0.6 per cent withholding tax on banking transactions has also welcomed the scheme and hoped it would help traders streamline their income tax filing process.

Economists, however, believe the scheme needs a strong political will to be implemented, which is lacking in this scheme. They point out that the present government does not have any effective mechanism or incentive to bring more people into the tax net. Pakistan’s tax-to-GDP ratio is declining over the years.

The latest State Bank of Pakistan (SBP) Annual Report on "State of Pakistan Economy" has actually slated the Federal Board of Revenue (FBR) for its failure to address structural problems in the taxation system. It indicated that tax-to-GDP ratio remained stagnant in the range of 8.5 per cent to 9.5 per cent over the last ten years.

Similarly, the present PML-N government has miserably failed to fulfill its commitments made in its election manifesto to bring all people into the tax net.

"This scheme is actually a financial NRO to benefit some selected people and will certainly fail because of its inbuilt faults," said Dr Shahid Siddiqui, Chairman of Research Institute of Islamic Banking and Finance.

No measures have been suggested to control the black economy, which is estimated to be 50 per cent of the total economy of the country. "Black economy amounts to around Rs15,000 billion and each year Rs500-600 billion are adding to it, but what steps have been taken to document that huge economy?" he asked.

According to Dar this scheme is only for traders, so Senators, MNAs, MPAs and persons convicted under narcotics, terrorism and money-laundering charges will not qualify for the scheme.

Dr Siddiqui said that the legislators often do business in the name of their sons, wives or relatives so how would the government ensure that these people are not benefiting from this scheme.

The proposed act provides opportunity to both non-filer and filer traders to avail this new facility to whiten incomes from trade by paying a nominal rate of income tax. This offer is valid for those traders whose working capital for the tax year 2015 does not exceed Rs50 million. The scheme offers traders to whiten their undeclared working capital of up to Rs50 million by paying just one per cent tax of the declared working capital in tax year 2015.

Economists point out that the government does not have any effective mechanism or incentive to bring more people into the tax net. Pakistan’s tax-to-GDP ratio is declining over the years.

Because majority of traders do not file their annual income tax returns, the government in the budget 2015-16 had introduced 0.6 per cent withholding tax on bank transactions exceeding Rs50,000 a day. The same tax for the filers of the income tax remained at 0.3 per cent, which can be adjusted at the time of filing of returns. The traders have been protesting on imposition of 0.6 per cent withholding tax on banking transactions and its applicability was deferred till October, 2015. The traders entered into negotiations with the government many times but failed to reach any agreement. This amnesty scheme is actually targeting only those traders who do not file their income tax returns. This was the second amnesty scheme announced by the Nawaz Sharif government to whiten undeclared capital. Earlier, just after taking over, the PML-N government had introduced a tax amnesty scheme in December 2013, but it failed to achieve the targets.

According to the government, the new amnesty scheme would permanently solve the issue of withholding tax as earlier the government had refused to withdraw the tax on traders’ pressure. This scheme would not be available on capitals like house, property and cars etc.

"The good incentive of this scheme is that those who avail this scheme would be exempted from the income tax audit by the income tax authorities for the next four years," said Umer Ahad, advocate and senior income tax consultant in Karachi. Otherwise, he said, it is not an amnesty scheme because the government has actually compelled traders to come into the tax net by paying a discounted rate of tax. If any trader failed to comply with the conditions of filing tax returns at increased capital during the next three years this scheme would not be applicable from the day one.

According to him, amnesty schemes are not considered a good step for taxation purposes, but due to the non-filing tendency in Pakistan, governments have to take such measures.

The major feature of the current voluntary tax compliance scheme is the progressive increase in the amount of undeclared capital for taxation. For the tax year 2016, the traders who avail this scheme will have to declare a turnover at least three times of the working capital declared in tax year 2015. For tax years 2017 and 2018, traders will declare turnover on which tax paid is at least 25 per cent more than the tax paid for the preceding year. "Once the returns are filed, the traders will have to comply with the conditions for the rest of three years," Ahad said.

The bill proposes three different tax slabs, which will be applicable for tax years 2016, 2017 and 2018. Under the slabs, it has been proposed that 0.2pc tax will be charged on declared turnover not exceeding Rs50 million. The rate of tax will be a fixed amount of Rs100,000 plus 0.15 per cent of the declared amount between Rs50 million and up to Rs250 million. A fix amount of Rs 400,000 plus 0.1pc tax will be charged on declared turnover of a trader in excess of Rs250 million.

The main thrust of this tax amnesty scheme is to use Information Technology (IT) to bring people into the tax net, but this would be an arduous task for the tax collection machinery in the FBR as the powerful lobby of traders has always resisted coming into the tax net for documentation.