Since 1980s, amongst many segments of society, the one that really created hassle for the tax departments (both federal and provincial), is that of tax-defiant traders. Though their contribution in total tax revenue is negligible (0.5 percent in income tax and 1 percent in sales tax), they exert substantial influence over politics.
It is disturbing to learn that the government has finalised yet another tax amnesty scheme instead of introducing asset-seizure legislature to confiscate untaxed assets, and make laws to bring back looted money from abroad. In principle, every tax amnesty and/or money whitening scheme is violative of supreme law of the land and amounts to encouraging immorality, illegality and cheating as well as betraying the honest taxpayers. On 28th December 2015, the Finance Minister directed the FBR officials to further improve the Voluntarily Tax Compliance Scheme making it more attractive for non-filers and filers to yield more taxes and broaden the tax base. The fact remains that it is yet another tax amnesty after the utter failure of the previous one prepared by the worthy Finance Minister in 2013 soon after third stint in power of Pakistan Muslim League (Nawaz).
On Nawaz Sharif's becoming prime minister for the third time, many predicted that there would be remote chances of enforcing tax laws as Pakistan Muslim League-Nawaz had a proven track record of appeasing traders and protecting tax evaders. Their prediction proved correct when in September 2013, the worthy Finance Minister proudly announced that "all demands of traders are accepted." With this announcement and tax amnesties personally announced by the Prime Minister for non-filers, the authority of the Federal Board of Revenue (FBR) was further eroded. As in the past, the traders showed complete disrespect to tax laws and concessions offered by the Premier and his team. They were neither ready to file income tax returns nor pay retail sales tax. It was shocking that only less than 4,000 persons availed the concessions paying a paltry amount of Rs 88 million despite extending the deadline of amnesty scheme from February 28, 2014 to April 30, 2014, defiant traders were least pushed to avail it. It is strange that after witnessing the abject defiance of '2013 Tax Incentive Package', announced by Nawaz Sharif himself, yet another amnesty scheme is on the cards.
According to press reports, the proposed scheme will allow the whitening of undeclared business capital and/or business assets up to Rs 50 million. Traders availing the amnesty will be exempted from audit for three years and no question will be asked about their sources of income!! They will have to pay only one percent as tax on their declared business capital in the first year. For filers of income tax returns, three different slabs will be announced to enable them to whiten their business capital. A nominal rate of 0.1 percent will be charged on declared turnover in excess of Rs 250 million and 0.15 percent in excess of Rs 100 million and up to Rs 250 million. Turnover between Rs 50 million and Rs 100 million will be charged at the rate of 0.2 percent. The scheme will be effective from January 1, 2016 for a period of one month and no extension will be allowed.
'2013 Tax Incentive Package' was in utter violation of the government's solemn promise to the Parliament in 2008 that after 'Tax Investment Scheme of 2008' no further tax amnesty will be introduced. The coalition government of PPP did not keep its words and offered unprecedented immunity to tax avoiders at the stock exchanges. It was claimed that this "facility" will help to bring black money into mainstream besides fetching substantial revenues.
Both the claims proved wrong. The tax evaders whitened their untaxed money and made profits at the cost of small investors. Though the government offered immunity to stock exchange investors (sic) in April 2012 and all kinds of concessions to tax evaders in the months of May and June 2012 to achieve the budget target of Rs 1952 billion, yet it was missed by over Rs 70 billion.
It is high time that our economic and tax managers should realise that amnesty schemes cannot be used as a measure to raise revenue as these discourage the honest taxpayers and create distrust in state institutions. On the contrary, practical and workable steps should be taken to deal with the menace of tax evasion and increase revenues by adopting innovative means-details discussed in 'Flat-rate Taxation: An Alternate Solution', Business Recorder, November 20 and 22, 2015. Amnesty schemes, by their very nature reflect defeatism, do not curb tax evasion but on the contrary, encourage it and widen tax gaps.
After many tax amnesties, it was admitted by FBR that tax gap was about 70%. The menace of tax evasion coupled with capital flight to tax havens has deprived the country of investment and employment. The issue of tax evasion should not be seen in isolation. Pakistan is suffering profoundly due to low revenue generation, resulting in huge fiscal deficit and debt burden as revenue leakages are increasing every year and looted wealth is parked outside. The onus is on the government to show firmness in dealing with the issues of corruption, flight of capital, tax evasion and tax avoidance as has been done recently by the Indian government issuing a detailed report that is available at http://www.itatonline.org/info/index.php/measures-taken-by-the-government-to-tacke-black-money/.
Historically, all tax amnesty schemes, which were nothing but a premium for dishonesty, miserably failed. The main reason has been existence of a permanent tax amnesty scheme in the form of section 111(4) of the Income Tax Ordinance, 2001 that facilitates tax evaders. It guarantees tax exemption for money brought into Pakistan through normal banking channels. This section protects tax evaders as they get untaxed money whitened by paying just extra 2% to 4% to any money exchange dealer to get remittance in their names. This section has helped bringing into Pakistan huge foreign funds as remittances, crossing the US $ 18 billion mark in the fiscal year 2014-15. This section has been abused cleverly by Pakistani tax dodgers to launder their untaxed money through state patronage!
Large-scale tax evasion and the existence of a large black economy while resulting in colossal loss of revenue to the state, tends to reduce the built-in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help generate inflationary pressures and raise prices of the real property. In the context of the prevailing grave challenge to combat terrorism, together with money laundering operations and the problem of ever-growing black money, (which according to official and independent experts, is twice the size of the regular economy), there is an urgent need to launch a well-thought for asset seizure law to prevent this huge money from becoming a lethal weapon in the hands of mafias who are now in control of economy as well as the government. Before launching such a law it is important to identify the sources that generate black money. If such sources are not blocked, black money will keep on thriving notwithstanding the existence of stringent laws. The presence of black money is very apparent in Pakistan, but its criminal accumulation and generation is not revealed and the offenders are not punished. This baffles the minds of honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties?
Money launderers and tax evaders in Pakistan enjoy state patronage. For example, if anybody brings money (earned from drug trade or any illicit activity or even one's own untaxed money, hiring services of local money exchangers to depict it as remittance) in Pakistan through normal banking channels, the State Bank and tax authorities do not pose any question about the "source." Tax evaders, drug-arm-human traffickers, rent-seekers and terrorist apparatus remit millions of rupees into the country every year from bank accounts maintained in various countries in fictitious names. This money, in the hands of drug-mafia, tax evaders and terrorist networks has made them invincible, besides making life harder and harder for those who earn from legitimate sources.
In the Income Tax Ordinance 2001, promulgated on the dictates of IMF on 13th September 2001, section 111(4) was inserted, facilitating money launderers to remit (laundered is a more appropriate term) their ill-gotten money through banking channels surrendering the foreign currency to the State Bank in exchange for Pakistani rupees as encashment. In this way they escape not only taxation but also any probe from FBR.
The people hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there would be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less an amount than what they would have been required to pay under the regular income tax/wealth tax regime. It is a tragic situation where the entire state apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who are paying their taxes honestly at much higher rates than those offered to tax evaders in amnesty. The ugliest face of black money emerges in the corridors of power, political as well as administrative.
Like '2013 Tax Incentive Package', announced by Nawaz Sharif in 2013, 'Investment Tax on Income' Scheme, inserted vide section 120A of the Income Tax Ordinance, 2001 also miserably failed. It gave facility to whiten untaxed money and assets by paying just 2%. It only fetched a meagre amount of Rs 2.5 billion. The earlier schemes also met the same fate. Under all the tax amnesty schemes introduced so far, FBR has failed to collect even a fraction of the black money in circulation. Record shows that Pakistanis never responded to any tax amnesty scheme knowing that by just paying 1.5% to 3% premium they could get all their money "legalised," courtesy section 111(4) of the Income Tax Ordinance, 2001 and section 3 read with sections 5 and 9 of the Protection of Economic Reform Act 1992.
We can also learn from the experience of India. In India, when the Voluntary Disclosure Scheme, 1997 was announced, the civil society strongly objected to the same and represented to the government to drop the proposal. However, the scheme was implemented. The civil society challenged the scheme before the Bombay High Court (1997) 228 ITR 63 and by way of further appeal to the Supreme Court (1998) 231 ITR 24. It is pertinent to mention that before the Indian Supreme Court, a statement was made by the then Attorney General of India that the government would not introduce any such scheme in future that could affect the morale of the honest taxpayers. In Pakistan we have a perpetual tax amnesty since 1992 in the form of section 5 and 9 of the Protection of Economic Reforms Act 1992 and section 111(4) of the Income Tax Law.
In India, more than 14 disclosure schemes were introduced but statistics given below confirm that the response had not at all been encouraging and the parallel economy continued to thrive. Today, the Indians and Pakistanis, courtesy many amnesties, have successfully stacked huge funds abroad.
Various schemes introduced in India included:
1) Demonetization of High Denomination currency notes in 1946 and 1978
Out of estimated stock of Rs 1,440 million in circulation in 1946, notes to the tune of only Rs 90 million were presented for conversion (6.25%) and the corresponding figures for the 1978 scheme were Rs 1,600.5 million in circulation and Rs 200 million converted (5.45%).
2) Voluntary Disclosure Scheme, 1951(Tyagi Scheme). Amount disclosed Rs 700 million and tax gathered of Rs 110 million only (15.7%).
3) Voluntary Disclosure Scheme, 1965.
Section 68 of the Finance Act, 1965, popularly known as '60:40 scheme': two thousand persons made disclosures amounting to Rs 520.18 million and paid tax of Rs 300.80 million only.
4) Voluntary Disclosure Scheme - II
Section 24 of Finance (No 2) Act, 1965, 114,226 persons made declarations offering income of Rs 1,450 million and paid tax of Rs 190.45 million.
5) National Defence Gold Bonds, 1980, issued in 1965
6) Voluntary Disclosure Scheme, 1975
Income declared was Rs 7,440 million and wealth declared Rs 8,340 million. Income Tax paid Rs 2,410 million and Wealth Tax paid Rs 70.70 million.
7) The 1981 Special Bearer Bonds, Immunities and Exemption Ordinance Act
The scheme provided for issue of 10 year bonds of the face value of Rs 1,000 each and on maturity the holders were to receive Rs 12,000 for each bond. The sales were not encouraging.
8) Amnesty scheme, 1985
This covered both Income Tax and Wealth Tax and the amount mobilised was a paltry sum of Rs 70 billion over a period of one year.
In 1991, Dr Manmohan Singh, then as Finance Minister, came up with a number of schemes for mopping up black money. The National Housing Bank Deposit, the Foreign Exchange Remittance Schemes, the India Development Bonds in the US dollars and the Gold Bond Scheme were all brought in. The National Housing Bank Deposit Scheme failed miserably. The India Development Bond and Foreign Exchange Remittance Schemes were in reality firefighting operations undertaken because of the precarious foreign exchange reserve position in 1991. Partial convertibility of the rupee was introduced in the hope that it would reduce the under/over invoicing racket by reducing the differential between the official and unofficial rates of exchange.
The first and foremost objection to any amnesty scheme is that it betrays the honest taxpayer and the nation as well. The message sent out by repeated tax amnesty schemes is that taxes are regularly paid by only the honest taxpayers, whereas the "wise" wait to avail benefits of such undesirable schemes. Instead of going for new tax amnesty scheme, the government should consider the following:
1. Honest taxpayers who are filing returns regularly should not be harassed. 98% returns could be accepted while only 2% returns may be scrutinised through selection based on a method that is both pragmatic and transparent. While administering tax laws, officers must encourage the culture of tax service rather than culture of tax collection. Tax Intelligence System (TIS) should be developed to detect tax evasion and under reporting.
2. Tax evaders must be dealt with iron hand. Tax Intelligence System and the process of Survey and Search must be intensified and all tax evaders who have not been filing returns must be brought in the tax net. When a person is subjected to search, the Government should not invite that person/entity to any official function till clearance from tax administration. Even the social and political organisations should refrain from calling such persons as chief guests and the tax evaders should not be honoured either by the government or any political/social organisations. Any person who is awarded with state honour, if later is found to be a tax evader; the government should strip him of the honour.
3. Lowering tax rates, efficient tax administration and granting refunds within prescribed time limit would encourage voluntary compliance. In Singapore, personal taxation ranges between 3.5% to 20%, while corporate tax is levied at 17%. With reduced tax rates, there would not remain any incentive to use the route of tax havens.
4. Encouraging honest officials and taking strict action against corrupt officials
When a government officer is caught for corrupt practice, a lot of publicity is given but the final outcome of the action is not made available to the public. Every year, FBR should publish such information on its website.
Laws alone cannot prevent the commission of crimes. Nor can a taxpayer whose position is that of a lamb before a corrupt wolf-like official, fight against corruption. It is the combined, united and forceful efforts of the government, taxpayers and tax practitioners that can do a lot for preventing corruption. FBR should engage Tax Bars in its efforts to fight corruption and revenue leakages.
Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan. According to figures released by independent quarters, the parallel economy is growing at an alarming rate of 22 to 25 percent per annum. Every fifth rupee transacted in Pakistan is black. This is not the final count. We have yet not accounted for kickbacks in arms deals, foreign trade, smuggling (eg, huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic.
It is tragic that in a country where billions of rupees are being made on daily basis in rent-seeking, speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low [below 10%] and the government seems least bothered to tax undocumented economy and benami (name-lender) transactions. The mighty sections of society are engaged in these transactions and FBR being their handmaid has neither will nor ability to tax them. It exposes the uselessness of FBR as an institution to tap the real tax potential of the country. It needs to be revamped and given the autonomous status like State Bank of Pakistan.
One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society. They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth. This shatters the faith of the common man in the dignity of honest labour and virtuous living. It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country's economy, which if not checked in time, is certain to culminate in its death. The answer is not yet another amnesty scheme but asset-seizure legislation to confiscate all un-taxed assets at home and having provisions to seek help of international comity and organisation to bring back looted and/or untaxed money back.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)