OF late, the tax authorities have taken to harassing those people who are already in the tax net, in response to pressure from the government to pick up the pace of revenue collection. Companies and individuals are finding themselves served with audit notices, and then offered the option of paying a nominal penalty to ‘get off the hook’. The most egregious example of this is the announcement that one million individuals who filed their returns late in the last three years have been automatically selected for audit, and that they can pay Rs20,000 for ‘closure of audit’. No doubt somebody in the bowels of the tax bureaucracy worked on a calculator to determine that such an exercise could yield up to Rs20bn in revenue — not a bad step towards plugging a reported hole of Rs100bn in the first quarter’s tax collection target. But the exercise looks just like a racket, and a rather insidious one at that, considering it is unfolding while return filing season is in full swing, and the government is trying hard to get more people to file their returns. In fact, it is sending out, in parallel, the wrong message that filing your returns makes you vulnerable to the arbitrary whims of the taxman. Perhaps, a million taxpaying parties are contemplating that they were better off not filing those returns in the previous years.

The story is similar when it comes to companies. Stockbrokers, for instance, have had to get a delegation together and pay a visit to the tax authorities in Karachi and Islamabad after receiving a flurry of new notices. The tobacco and sugar industries are finding out that they seem to have been identified as low-hanging fruit in a ramped-up effort to squeeze more tax out of compliant parties, as enforcement actions against them are similarly increased. Examples are now proliferating of tax-enforcement actions that are thinly disguised shakedowns of those who have honestly filed their returns.

It was never a great idea to use tax enforcement as the main driver for increasing revenues. The enforcement function is better used to promote a culture of compliance. For increasing revenues, tax reform is the path, or a vision for reform of the schedule of incentives so that potential taxpayers — ie those who are noncompliant at the moment — face the right mix of incentives and penalties to change their behaviour and consider becoming compliant. Shaking down salaried individuals who have filed their returns, and whose deductions are made at source in any case, is not the way, because it serves as an example for those outside the net to remain where they are. The racket should end, compliant taxpayers should be left alone, and the government should hurry up and reveal its vision for tax reform and the broadening of the tax base.

Published in Dawn, November 21st, 2018