Wrong signal on taxes

Published September 25, 2018

As the tax season draws to a close — barring an extension — it is imperative that the government send clear signals to taxpayers about the benefits of tax compliance.

A key part of any effort to broaden the tax base and promote documentation of the economy is to raise awareness about tax compliance, and to build a culture of filing returns. Far too many people are accustomed to not filing returns, and this habit that they have developed over several years needs to be broken if other documentation and revenue-broadening measures are to be effective.

One way of promoting this is to ensure a sharp demarcation between tax filers and non-filers, and start introducing obstacles in the execution of normal business transactions for the latter category. One of the better policy measures initiated by the previous PML-N government was the creation of the Active Taxpayer List; this should be built on to introduce new restrictions every year for those whose names are not on the list.

The latest of these restrictions was introduced in the budget passed in May. It forbade local government entities to register property and new vehicles purchased by non-filers of tax returns. The new PTI government reversed this ban in its latest mini-budget, arguing first that it made it impossible for overseas Pakistanis to invest or do business in the country, and then that the ban violated Article 23 of the Constitution, which guarantees all citizens the right to own and sell property across Pakistan.

When this reversal came under sustained criticism after it was introduced, Finance Minister Asad Umar started signalling that the government may well be ready to back away from it and search for other mechanisms whereby overseas Pakistanis and others not required by law to file returns in Pakistan can be kept out of the ambit of the ban.

So now an ambiguous situation has been created. It is not clear how difficult it will be to remain a non-filer. It is hoped that the government will continue with, and build upon, the reform that began with the compilation and publication of the ATL, extending the so-called ban on the activities of non-filers to foreign travel as well as maintaining bank accounts.

It is good and healthy in an economy like Pakistan’s for people to frequently be confronted with the question ‘are you a filer or non-filer?’ — the way forward ought to be made a little more difficult, and a little more expensive, if their answer is ‘non-filer’.

It is easy to work around the fact that there are many people who are not legally required to file tax returns with the FBR. That should not become a reason to roll back the reform altogether.

Published in Dawn, September 25th, 2018

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