Daily Times Editorial Jan 3, 2016

Tax amnesty again Prime Minister (PM) Nawaz Sharif has reached out to his business constituency to bolster tax revenues. In a meeting with business leaders on Friday at the PM’s secretariat, Nawaz Sharif appealed to the traders’ sense of patriotism to help the country’s development needs by cooperating with the Federal Board of Revenue (FBR) in paying taxes under a concessional amnesty scheme. The scheme envisages amnesty for non-filers and a voluntary tax filing procedure over the next four years. One of the bones of contention of late between the traders and the government was the tax on banking transactions, but the reports fail to clarify whether and when the offending measure will be reversed. In the meantime, while the PM argued that tax rates should be brought down to encourage people to file their income tax returns, he also instructed the FBR chairman not to pressurise any person unjustifiably and treat taxpayers with respect. To give legislative teeth to the proposed tax amnesty, the government has tabled the Income Tax (Amendment) Bill 2016 in the National Assembly (NA) and suddenly extended the session of the NA in order to get the Bill passed immediately. The hasty manner in which the NA session has been extended has surprised many parliamentarians. Perhaps the government’s anxiety and hurry is traceable to International Monetary Fund (IMF) pressure to take steps to widen the tax base, a conditionality of the IMF’s Extended Fund Facility programme. The Bill envisages allowing businessmen to whiten their undeclared profits by paying a nominal amount of tax. This four-year tax amnesty scheme will apply to both filers and non-filers (defined as those who have not filed a return for the last 10 years). It will not apply to parliamentarians, persons convicted on narcotics, terrorism and money laundering charges. The measures proposed are expected to add about two million new taxpayers to the exceedingly narrow existing tax base of some one million taxpayers out of a population of around 200 million. Up to Rs 50 million undeclared working capital can be whitened by paying one percent tax on the declared working capital in tax year 2015. For tax year 2016, traders would have to declare turnover showing at least three times the working capital declared for tax year 2015. For tax years 2017 and 2018, they would have to declare turnover on which the tax paid is at least 25 percent more than the preceding year. Another option offered is for traders to pay turnover tax for the next three years. Different tax slabs have been proposed for tax years 2015, 2016 and 2017. All businessmen taking advantage of the amnesty scheme will be exempt from audit and any questions about the source of their income for four years. However, the Bill excludes whitening real estate, vehicles, shops and non-business assets. The conditionalities of the IMF programme aside, the government desperately needs to boost its revenues. One of its traditional milk cows, i.e. taxes on POL, has suffered a reduction because of low international prices. To make up the shortfall, Finance Minister Ishaq Dar had recently imposed additional customs duties on what he called luxury imports, but contrary to his assertions, this fresh indirect taxation or mini-budget as it has been dubbed, has fuelled a spike in inflation. The amnesty scheme therefore represents the midnight oil the finance ministry gnomes have been burning ever since to find ways and means to increase tax revenue and keep the IMF happy. This is not the first time such a tax amnesty has been offered to businessmen, especially traders. However, if the past is any guide, these schemes failed to live up to expectations. Whether this one will fare better only time will tell. There is however one factor that may make the current amnesty scheme’s prospects better than its predecessors. A pro-business government is in power that has seemingly persuaded the business community to bail it out of its revenue collection difficulties by whitening its undeclared income through concessional tax rates. Appeals to patriotism notwithstanding, the bazaar has not been known for a responsible taxpaying culture in the past, if anything quite the contrary. Whether it and the wider business community will step up to the plate in these dire times is the sixty four thousand dollar question that may make or break the government’s ambitions and aspirations regarding a kevel of revenues that can keep the IMF quiet and cooperative while helping finance the revenue and development budgets of the country.