Who wants a tax amnesty?

Published January 7, 2016
The writer is a member of staff.
The writer is a member of staff.

NOBODY likes tax amnesty schemes, not even the beneficiaries.

Left to their own devices, the citizenry of any country would prefer to enjoy all the protections that a functioning state affords without paying anything for the maintenance of their collective welfare.

And in an ideal world, the state would simply need to order people to pay their taxes, and the next day revenues would materialise.

But the citizenry cannot be left to its own devices, because in gorging themselves on the fruits of their self-interest, they will devour the very sinews of the social fabric that keeps us all together. And we do not live in an ideal world, and the rulers cannot simply will revenues into being through the sheer coercive power of the state.

So how do you go about ‘broadening the tax base’ in a country where one sector — wholesale and retail trade — has practically grown up outside the tax machinery altogether? How do you bring them into the tax net when they were largely born and raised outside it, today rising to become almost 18pc of our total GDP (at current prices), only slightly smaller than industry as a whole? And how do you do that considering they are constituted of millions of small- and medium-size players, rather than being dominated by a few big players?


The latest tax amnesty scheme announced by the government has the merit of combining both, the carrot and the stick, and for that reason it stands a decent chance of success.


You use the carrot and the stick, simultaneously. You cannot use only one of these implements, because their ranks are too multitudinous and their transactions too dispersed to be herded easily by the lumbering machinery of our revenue system.

Incentives alone they will devour like termites, leaving nothing behind. The stick alone will be like swatting a herd of bees with a sledgehammer.

The latest tax amnesty scheme announced by the government has the merit of combining both, the carrot and the stick, in a smart combination that requires minimum recourse to coercive measures, and for that reason, it stands a decent chance of success.

Those comfortable in the assurance that “it will not work” have no reason to oppose the measure, since by their own logic, if it doesn’t work, then no harm done, we’ll still be left with the same status quo that we have.

But what if it does work? Consider the devil’s abode in all this: the details. The scheme is very narrow in its impact, and graduated in how it steadily weans large segments of the trader community into a culture of filing returns.

It’s designed specifically for traders, engaged in trading activity. In this alone, it is different from past amnesty schemes, which were blanket amnesties of sorts. Second, it applies to undeclared working capital, and tries to get at the income streams of the traders through their turnovers.

So what is not covered? All incomes belonging to economic agents other than traders, engaged specifically in trading activity. And all assets accumulated outside the tax net over the decades, which was a big demand of the trader community during the long-drawn negotiations that have been under way since July.

Trader incomes are very hard to discern, given the current state of technology, but turnovers are visible from bank account information, so the tax authorities will be using turnover as a proxy of sorts to get at incomes.

Next, there is a graduated upward incline in the incentive structure of the scheme. If you’re a trader, and you avail the benefits of this scheme this year by simply paying 1pc on the opening working capital for 2015, then next year you will be able to continue availing yourself of its provisions only if your declared turnover is at least three times of the working capital declared in 2015. For the next two years, you will be allowed to continue only if the total tax paid is 25pc more than what it was in 2016, based on turnover.

There don’t appear to be any exit ramps. Once you’re in the scheme, you must climb that hill and make sure your declared turnovers are increasing according to the stipulated ratios. After three years, we’ll have a new government and they can decide how far and how fast they want to reel this catch in.

The trader community, after mounting a spirited protest against the withholding tax on bank transactions of non-filers, had splintered early. Those old stalwarts, like Naeem Mir of Mall Road traders in Lahore, or Ashraf Bhatti of Anarkali, had favoured reconciliation with the government rather than confrontation.

A few, like Mazhar Amin Butt of Hall Road, took a more overtly political line, saying the PTI speaks for his constituency and he opposes this measure. But what does he want instead? “We only want the removal of the withholding tax on bank transactions. Period” he tells me.

Now that’s hardly a vision for broadening the tax base. Others in the manufacturing community are dismayed that the full and final liability on the turnover tax is so low for traders, but so high for manufacturers. “Should we all become shopkeepers?” they ask.

Perhaps, but this is more than just an economic proposition at this stage. This is a mindset issue and a cultural issue.

This is about getting a rather large and unruly lot, who have grown up outside the tax net completely, to at least start filing their returns. That won’t happen in one year, not even two.

If the scheme can meet even half of its target of one million new filers, it would have gone further than all other schemes in the past. The revenues may well take longer to come in. Given the nature of the landscape here — large number of players with lots of small-time transactions — the documentation challenges can only be met slowly, with carrot and stick, and a little gentle goading. Frankly, I like the scheme. It should be given a chance to demonstrate its potential.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, January 7th, 2016

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