Can tax Amnesty Scheme Broaden Tax Base?

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The new amnesty scheme, the eighth in Pak­istan so far, aims to bring a greater pro­por­tion of peo­ple into the tax net. In­creas­ing the tax base is rightly a top pri­or­ity in a coun­try where less than 0.61 per cent of the to­tal pop­u­la­tion filed tax re­turns in 2017.

Tax col­lec­tions are stag­nant at around 10pc of the gross do­mes­tic prod­uct, the bal­ance of pay­ment is dis­turbed and for­eign re­serves are erod­ing. The amnesty of­fers his­tor­i­cally low in­come taxes, dou­bles min­i­mum tax­able limit and charges no­tice­ably lower on tak­ing amnesty.

At face value, the scheme has all the con­structs of be­ing suc­cess­ful. The his­tory of amnesty schemes in Pak­istan how­ever, is not a very en­cour­ag­ing one. No amnesty has been able to gen­er­ate a size­able num­ber of new tax­pay­ers or rev­enue.

The amnesties of 1958 and 2000 helped file only 71,289 and 79,411 newly de­clared. The amnesty of 2008 gen­er­ated the high­est col­lec­tion of Rs2.8 bil­lion at the an­nounc­ing rate of 2pc, while that of 1997 could raise only Rs141 mil­lion.

Com­pare it to the In­done­sian amnesty bill of 2016 which added at least 745,000 tax­pay­ers declar­ing more than $330bn of as­sets. The re­cent amnesty how­ever, has some strong ar­eas. First, the global en­vi­ron­ment is con­ducive to amnesties.

The world is clamp­ing down hard on any un­de­clared as­sets, cash or prop­erty. This will push Pak­ista­nis to take amnesty and le­galise the as­sets. Se­condly, the charg­ing rate is con­sid­er­ably lower with a max­i­mum rate of 5pc when the per­son wants to come into the tax net but wants to main­tain as­sets out­side the coun­try.

The gov­ern­ment must de­lin­eate well-struc­tured post-amnesty tax­a­tion re­forms pack­age and le­gal action against non-com­pli­ance. Only then can one an­tic­i­pate sig­nif­i­cant gains in the tax base.

Com­pare it to the 45pc charge rate in amnesty of­fered re­cently in In­dia to its cit­i­zens. The over­whelm­ingly lower new in­come tax rates would mo­ti­vate peo­ple to come into the tax net. For ex­am­ple, the max­i­mum limit of 35pc in­come tax is now re­duced to 15pc.

Sim­i­larly, those in the in­come group pay­ing 17pc ear­lier will now pay 10pc. Lastly, the sim­pli­fi­ca­tion of tax fil­ing shall add to the dec­la­ra­tion num­ber since us­ing the na­tional iden­tity card num­ber as the tax num­ber will re­sult in ev­ery one be­ing au­to­mat­i­cally en­listed in the data­base. Nonethe­less, some faults in the amnesty scheme if not cor­rected may out­weigh its mer­its. First and fore­most, doubts about the fu­ture course of action of the next gov­ern­ment may de­ter po­ten­tial dec­la­ra­tions.

Of­fered by an out­go­ing gov­ern­ment,

it not only lacks po­lit­i­cal own­er­ship but also suf­fers from un­cer­tain­ties about fu­ture val­i­da­tion. An­nounc­ing the scheme at the be­gin­ning of the gov­ern­ment’s ten­ure would have added to the odds of suc­cess.

Po­lit­i­cal par­ties have not been taken on board, as de­noted by quick re­sis­tance from op­po­si­tion par­ties. Sim­i­larly, un­cer­tainty re­gard­ing the po­si­tion of prov­inces is likely to dampen dec­la­ra­tion rates.

The amnesty has not been fol­lowed by a set of struc­tural re­forms to con­sol­i­date the gains what­so­ever. Peo­ple do not pay taxes be­cause they be­lieve they will not get caught. A solid tax base can only be war­ranted through an ef­fi­cient tax sys­tem that en­sures that eva­sion will even­tu­ally lead to pun­ish­ment.

In­cen­tives alone may not suf­fice. Present amnesty fails to out­line any penal­ties, leav­ing po­ten­tial can­di­dates un­able to do any cost-ben­e­fit anal­y­sis re­quired to make up their minds. Some le­gal is­sues may also com­pro­mise the gains from amnesty.

For ex­am­ple, the gov­ern­ment needs a con­sti­tu­tional amend­ment to en­force a model sim­i­lar to the In­dian one of buy­ing prop­erty by pay­ing some ad­di­tional price if it thinks that prop­erty value is un­der-re­ported.

As the cur­rent po­lit­i­cal land­scape de­notes, such an amend­ment will not be easy to pass. This will push the dec­la­ra­tion rate lower. Of­fered charges of tak­ing amnesty will bring smaller rev­enue even if dec­la­ra­tions are made.

Ad­di­tion­ally, there will be com­plete tax ex­emp­tion on an­nual in­come up to Rs1.2m. Many will fall out of the tax net. The scheme also does not of­fer any dis­tinc­tion be­tween de­clared as­sets that are repa­tri­ated for the pur­pose of in­vest­ment and those not des­tined to in­vest­ment.

The com­mon prac­tice is to charge a lower rate on the for­mer. To min­imise re­luc­tance to take amnesty, the gov­ern­ment must take steps to con­vince the op­po­si­tion that the scheme is wellde­signed and help­ful to the econ­omy.

The gov­ern­ment must de­lin­eate well-struc­tured post-amnesty tax­a­tion re­forms pack­age and le­gal action against non-com­pli­ance. Only then one can an­tic­i­pate sig­nif­i­cant gains in the tax base. Un­der present ar­range­ments, gains are hard to come by.

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