One of the most courageous steps undertaken by any government in decades, for documentation of the economy, was a little section inserted into the Income Tax Ordinance of 2001 that allowed authorities to peek into people’s bank accounts. It was titled Section 165A and was passed into law via the finance bill in this government’s maiden budget of 2013.
Most people don’t know about this little section, but the furore it sparked from those who were impacted by its application tells the story of how we are left with such a large undocumented sector in our economy. This undocumented sector is largely what prevents the state from realising more revenue, causing the tax-to-GDP ratio of the country to lag further and further behind that of our main competitors.
Opposition to Section 165A came from the banks, with the Pakistan Banks Association leading the charge. They argued that the section “will seriously hamper the FBR’s drive towards documentation and promote informal and parallel sector of the economy” by encouraging money to flow into property instead, where settlements can be done in cash. The provision would also make deposit mobilisation more difficult and discourage financial inclusion in their view.
In response to the petition moved by the banks against Section 165A, a stay order was granted by the Lahore High Court against its operation.
The stay was vacated in December 2014, after an agreement had been reached between the banks and the government. The agreement was that account details of only those individuals whose accounts saw deposits in excess of Rs1m per month and who had not filed a return in the preceding year would be made available to the tax authorities.
This agreement was a step backwards in the government’s efforts to promote documentation and broaden the tax net.
In this first of a three-part series, a chartered accountant argues that strengthening the power of the authorities to assess taxpayer finances is central to any effort to advance documentation.
The opposition to the section came from wealthy clients of the banks according to media reports on the case. The fact that the banks find themselves in competition with the property market for handling people’s money is clearly the problem here, and not the powers contained in Section 165A itself. The defence mounted by the banks is the clearest evidence that a substantial share of the money being deposited into their accounts is in fact tax evaded.
So the first question that naturally arises is this: should tax authorities be allowed access to people’s bank accounts? Pakistan is one of the few countries in the world where tax authorities are disallowed access into people’s bank accounts for purposes of audit and assessment.
Since the number of bank accounts is almost ten to fifteen times the number of taxpayers, are all the bank accounts and balances therein (in own name or ‘benami’) of a particular person, who is otherwise on the national tax record by way of having an NTN, reflected in the return of income so filed by that person?
There may not be a direct relationship between bank accounts and taxpayers, but the sheer disparity in the numbers between the two suggests that tax evaded money is undoubtedly parked in the banking system in substantial quantity.
Getting at this money is vital for the revenue effort of the state, and it won’t be possible if tax authorities are prevented from even being able to see this money.
Some argue that the tax authorities behave like extortionists with the powers they are given. Making people’s personal transactions visible only encourages corruption. Again, this argument may be true to some extent, but it does not mean that the tax authorities ought to be rendered blind in their efforts to assess people’s tax liabilities. It is at best an argument for strengthening oversight of the tax machinery.
Much of the blame for this state of affairs lies with public finance policies over the decades. There has been a steady and discreet encouragement of tax evaded money built into our tax code over the years, and the money that currently enjoys the privilege of lying beyond the reach of the tax authorities has tremendous clout behind it.
The most glaring and apparent example of this is transactions relating to imports of finished goods, valued at more than $10bn per year in total. The laws governing imports of these goods are perfectly and totally opposed to documentation. There is no requirement to have any record of price and profit of subsequent sales of imported products and a deemed profit is presumed for calculation of both, sales tax and income tax. Correction is reciprocally required, and institutional weaknesses should be remedied, rather than invoked as excuses to obstruct critical tasks.
This presumptive taxation exempts the importer from all obligations to record and document any subsequent transaction after the relevant tax obligations have been discharged at the import stage. Such presumptive measures, when applied to a segment of imports that total almost half of our non oil imports, effectively exempts a large section of our economy from all documentation obligations. This is a failure of our revenue effort on a staggering scale.
It is said that taxes are the price of civilisation. There can be no state, and no rule of law, without proper revenue mobilisation. And revenues do not come walking through the door of the tax authorities. They have to be assessed and levied at the pain of penalty. If we bargain with this power to assess revenues, we are effectively bargaining away the writ of the state. The importance of documentation cannot be emphasised enough, and documentation will not happen by itself. It needs to be pushed, and every push will meet resistance. Overcoming this resistance is central to promoting the revenue interests of the state.
The writer is past President of the Institute of Chartered Accountants of Pakistan
Published in Dawn, May 17th, 2015