Traders and amnesty scheme

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.