Traders and amnesty scheme

The Pak Banker - - 4EDITORIAL - Umair Javed

THE Na­tional As­sem­bly re­cently passed the In­come Tax (Amend­ment) Act of 2016. This is the for­mal name given to the govern­ment's Vol­un­tary Tax Com­pli­ance Scheme - a pol­icy tool de­signed to in­crease tax-fil­ing and longterm tax pay­ment through a one-off amnesty win­dow specif­i­cally for ac­tors in the retail/whole­sale sec­tor.

Much has al­ready been writ­ten about amnesty schemes and their strate­gic and moral value for the coun­try's fis­cal cul­ture. Sev­eral com­men­ta­tors say it's an in­sult to those 600,000 odd fil­ers who've been pay­ing their taxes in full for most of their work­ing lives. The salaried, for­mally em­ployed middle and up­per class, specif­i­cally, may feel par­tic­u­larly ag­grieved by it. Oth­ers take is­sue with the oc­cu­pa­tion­ally nar­row largesse - geared only to ben­e­fit traders and ac­tors as­so­ci­ated with distribu­tive ser­vices. No such scheme has been of­fered to man­u­fac­tur­ers or other cat­e­gories of eco­nomic ac­tors.

Those in favour, or those ex­er­cis­ing cau­tious op­ti­mism, point out the po­ten­tial gains that could be made with a scheme such as this one. For starters, it may in­crease the to­tal num­ber of fil­ers by any­where be­tween 500,000 to one mil­lion in­di­vid­u­als. Th­ese in­di­vid­u­als will then be part of the tax net, and while they'll con­tinue to pay a dis­counted rate of tax (and re­main un­hin­dered by au­dits for sev­eral years), they will even­tu­ally fall in line with other tax­pay­ers in the long-run. It gives the per­pet­u­ally rev­enue-starved govern­ment vis­i­bil­ity over a po­ten­tial, as yet-un­tapped tax base.

To an­a­lyse its po­ten­tial short- and long-run ben­e­fit or harm, and, more im­por­tantly, its chances of suc­cess, one needs to look at the political-econ­omy fac­tors that led to its cre­ation in the first place. The govern­ment's eco­nomic pol­i­cy­mak­ing is ex­posed to in­put do­mes­ti­cally and in­ter­na­tion­ally. In the do­mes­tic plane, it re­ceives sig­nals and in­puts from below - ie from im­por­tant seg­ments of the elec­torate. Over here, as with all states with weak rev­enue ca­pa­bil­i­ties and low au­ton­omy, the sig­nals are clear - lower tax­a­tion, more largesse, less en­croach­ment and regulation, and greater rents.

The Pak­istani busi­ness­man, for the most part a rent-seeker, has evolved to profit off con­ve­nient pro­tec­tions, over­sights, and favours, and will fight tooth and nail to main­tain his au­ton­omy from govern­ment regulation and ex­trac­tion. A seg­ment of the rul­ing party's core elec­torate - let's call them Group A - is ex­actly this par­tic­u­lar pop­u­la­tion.

There are, how­ever, other, in­creas­ingly vo­cal sig­nals com­ing from the gen­eral elec­torate as well. Th­ese are for im­proved de­liv­ery of so­cial ser­vices, bet­ter in­fra­struc­ture, and more ef­fec­tive govern­ment func­tion­ing. Let's call this sec­tion Group B. Given that all of their de­mands cost money, the govern­ment is caught in a bind be­tween favour­ing Group A by not tax­ing them, and ser­vic­ing the needs of the numer­i­cally big­ger Group B. His­tor­i­cally, gov­ern­ments in Pak­istan have paid lit­tle at­ten­tion to Group B, since poor peo­ple are sel­dom well or­gan­ised, and have mostly turned to in­ter­na­tional lenders to solve their rev­enue short­fall. The se­cond source of pol­icy in­put thus comes from in­sti­tu­tions pro­vid­ing the govern­ment rev­enue - prin­ci­pally the IMF. This time around the IMF's pres­sure to en­hance do­mes­tic rev­enue ca­pac­ity led to the cre­ation of a with­hold­ing tax on bank­ing in­stru­ments, a move that di­rectly en­croaches upon the au­ton­omy of Group A.

Given the protests that emerged in the wake of the ini­tial im­po­si­tion, the govern­ment's do­mes­tic cal­cu­lus vis-àvis Group A came into play, and the tax was re­duced twice, and the min­i­mum trans­ac­tion size in­creased at the same time. It wasn't - and this is fairly im­por­tant - done away with as was ini­tially de­manded by the trad­ing com­mu­nity.

This sug­gests that the govern­ment is, pos­si­bly for the first time in its his­tory, ex­er­cis­ing some em­bed­ded au­ton­omy from a core group that's largely had its way with pol­i­cy­mak­ing in the last few decades. It may also sug­gest that the de­mand for im­proved ser­vices from Group B and thus the need for greater rev­enue sud­denly mat­ter more to the govern­ment than it has be­fore.

This amnesty scheme comes across as the fi­nal set­tle­ment be­tween a chunk of the trad­ing com­mu­nity and the govern­ment. It trades short-term largesse and pa­tron­age (re­duced tax rates, au­dit ex­emp­tions, and money-whitening pro­vi­sions) for long-term in­volve­ment in the tax base. The gains from this agree­ment are piv­oted on one ba­sic fac­tor - Group A cur­rently does not have an exit op­tion. Given the PTI's political po­si­tion in Pun­jab, the busi­ness com­mu­nity does not have a po­ten­tial pa­tron-in-wait­ing it can turn to. It is re­liant on PML-N for pa­tron­age, and re­liant on pa­tron­age for prof­itabil­ity.

This can all change if a vi­able al­ter­na­tive comes up, which con­sid­er­ing the Pak­istan Tehreek-i-In­saf's op­po­si­tion to the amnesty scheme, does not seem to be on the hori­zon. Rarely have stars aligned in this man­ner for any sit­ting govern­ment that's at­tempted to touch the retail-whole­sale sec­tor. For pes­simists, how­ever, the long-term gains be­ing touted ap­pear to be out of reach. For starters, the in­ef­fi­cient tax bu­reau­cracy may sim­ply fail to ex­tract from new fil­ers af­ter the ex­emp­tion pe­riod lapses. It may set­tle into old col­lu­sive ar­range­ments with traders, by en­abling eva­sion in ex­change for bribes. In an­other sce­nario, ur­ban political tur­moil may lead the govern­ment to con­sol­i­date its hold amongst traders by of­fer­ing them more ex­emp­tions with­out ex­pect­ing rev­enue in re­turn. All de­bates aside, what is clear though is that the amnesty scheme is the prod­uct of a par­tic­u­larly unique set of political econ­omy fac­tors fac­ing the govern­ment. IMF/len­der's pres­sure, no exit op­tion for traders, and in­creased clam­our­ing for im­proved ser­vices from below all mat­ter at this point. This del­i­cate bal­ance, com­bined with the abil­ity of the govern­ment to ex­tract ef­fec­tively, will even­tu­ally de­ter­mine the suc­cess or fail­ure of this scheme in the long-run.

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