THERE is no reason to resist the latest amnesty scheme, the eighth in Pakistan.

Increasing the tax base is rightly a top priority in a country where less than 0.61 per cent of the population filed tax return in 2017, tax revenue is stagnated at around 10pc of GDP, balance of payments is disturbed and foreign reserves are eroding.

Taken at face value, the scheme has all the ingredients for success: it offers historically lower income taxes, doubles the minimum taxable limit and charges noticeably lower on taking amnesty.

The government must take steps to convince opposition parties that the current scheme is well designed and helpful for the economy

However, the history of amnesties in Pakistan is not very encouraging, as no such scheme has attracted a significant number of new taxpayers or generated noticeable revenue.

As many as 71,289 and 79,411 new declarations were filed as a result of the amnesties of 1958 and 2000. The 2008 amnesty elevated the highest collection of Rs2.8 billion at the announcing rate of 2pc while that of 1997 could only raise Rs141 million. In 2013, about 50,000 cars on which customs duty had not been paid took advantage of the amnesty scheme.

To compare, the Indonesian amnesty bill of 2016 added at least 745,000 taxpayers declaring more than $330bn of assets.

Pakistan’s latest tax amnesty has four strong areas. First, the global environment is conducive for amnesties. The world is going hard on any undeclared assets, cash or property. This will push Pakistanis to take amnesty and legalise their assets.

Second, the charging rate is considerably lower at a maximum rate of 5pc for those who want to come into the tax net but want to maintain their assets outside the country (as compared to 45pc in a recent Indian amnesty scheme).

Third, overwhelmingly lower new income tax rates would motivate people to get into the tax net. For example, the maximum limit of 35pc income tax is now reduced to 15pc. Similarly, the income group paying 17pc before the amnesty will now pay 10pc.

Fourth, simplifying tax filing is also likely to help increase the number of taxpayers. Merging the national tax number (NTN) with computerised national identity card (CNIC) number will help the government monitor tax compliance of all citizens.

Nonetheless, there are some cracks in the amnesty scheme which, if not corrected, may outweigh its merits.

First and foremost, doubts about the future course of action of the next government may resist potential declarations. Offered by a government whose term is going to end in the next 80 to 90 days, the current amnesty not only lacks political ownership but also suffers uncertainties about its future validation. Announcing the scheme in the beginning of the government’s tenure would have added to its odds of success.

Second, political parties are not taken on board, as denoted by the quick resistance from opposition parties.

Third, the amnesty is not followed by a set of structural reforms to consolidate the gains, if any. People don’t pay taxes because they believe they won’t get caught. The tax base can only be warranted through an efficient tax system ensuring that evasion will eventually lead to punishment. Incentives alone may not suffice. The present amnesty fails to outline any punitive measures, leaving potential candidates unable to do any cost-benefit analysis required to make up their minds.

Fourth, some legal issues may compromise gains from the amnesty. For example, the government needs a constitutional amendment to enforce the Indian model of property buying by paying some additional price if it thinks the value of a property is under-reported. In the current political environment, such an amendment will not be easy to get passed, particularly from the Senate.

Fifth, the offered charges of taking amnesty will bring smaller revenue even if declarations are made. Lower declaration will aggravate the situation further. Additionally, many salaried individuals will go out of the tax net, as there will be tax exemption on an annual income of up to 1.2m.

Therefore, a large number of declarations are required to ensure net gains. Also, the scheme does not offer any distinction between declared assets that are repatriated for the purpose of investment and those not destined for investment. Common practice is to charge lower rate on the former. No significant investment impact of the scheme is anticipated under a uniform rate.

To minimise reluctance to take amnesty, the government must take steps to convince opposition that the current amnesty scheme is well designed and that it is helpful for the economy. Trust in the future course of action regarding tax amnesty can help clean up the underground economy.

The government must delineate well-structured post-amnesty taxation reforms package and legal action against people who do not take part in the amnesty. Only then one can anticipate significant gains in tax base. Under present arrangements, gains are hard to come by.

The writer heads Policy Solutions Lab at the Sustainable Development Policy Institute, Islamabad

Published in Dawn, The Business and Finance Weekly, April 9th, 2018

Opinion

Editorial

IMF package
Updated 28 Jan, 2023

IMF package

While it is crucial to seek immediate IMF funding to shore up its reserves, the govt shouldn’t focus only on short-term relief.
Dar unpegged
28 Jan, 2023

Dar unpegged

IT is over. Nearly four months after Ishaq Dar descended on the cash-strapped economy with some decidedly outlandish...
Lurking hazards
28 Jan, 2023

Lurking hazards

OVERSIGHT of illegal industrial activity occurring within residential areas in the country is weak, especially in...
Election time
Updated 27 Jan, 2023

Election time

There are concerns whether the ECP will be sufficiently able to protect the integrity of elections if they are held under partisan governments.
SCO invite
27 Jan, 2023

SCO invite

THOUGH India’s invitation to Pakistan to attend the Shanghai Cooperation Organisation events in Goa later this ...
Call to arms
27 Jan, 2023

Call to arms

ONE way the state abdicates responsibility in Pakistan is by farming out its functions to the private sector. In ...