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Protecting the black economy

Updated October 01, 2018

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THE government appears to be backtracking on its decision to remove restriction on the purchase of vehicles and property over Rs5 million by non-filers of tax returns after widespread public criticism.

There are indications that Finance Minister Asad Umar, in his wind-up speech on the supplementary budget, would envisage exemptions to some genuine cases and keep intact the overall ban introduced by the PML-N government which was considered to be crucial for documenting the economy, broadening the tax base and increasing tax recoveries.

As a consequence of the PML-N policy, the ‘own money’ on sale and purchase of new cars had almost vanished over the past two months and car manufacturers had been campaigning for an end to the restriction as their sales had tumbled dramatically. Likewise, the powerful real estate developers and property dealers had been lobbying extensively to get rid of the restriction that dampened the property business.

Real estate has been the key to the black economy. The inability of the provincial governments to document this area and bring it under an effective taxation system has been the major cause of the failure of the 7th National Finance Commission to the increase tax-to-GDP ratio.

There are indications that the finance minister would envisage exemptions to some genuine cases and keep intact the overall ban introduced by the PML-N government

It was after this failure that the former finance minister Ishaq Dar led economic team had done away with, after a long hiatus, the so-called DC rates for registration of property to be replaced with an indicative price that was far below the actual market rate.

Even then a lot of amendments intruded into the scheme as vested groups found a way around. Therefore, the departing strike former finance minister Miftah Ismail to block the purchase of vehicles and property by non-filers was considered one of the deadliest attacks on the black economy.

Surprisingly, the Federal Board of Revenue (FBR) appears to be changing its position. While it had supported the ban when the PML-N had introduced it in the budget and the Boards had expected to gain revenue, the FBR now seems to support the PTI when it is set to lose revenue.

A senior FBR official therefore argues that the abrupt implementation of any reform on the informal economy will cause serious damage to the entire economy. “We have to resolve the matter in a way that the real tax evaders cannot escape and those who are not genuinely required to file returns are protected including pensioners, widows, overseas Pakistanis and those who have inherited properties or those who are not legally required to file returns.”

The new PTI government had nothing to lose in continuing with the ban when the blame for a slowdown in the underground economy had already gone to the PML-N. Instead, the it gave a contradictory message to the economy when it advocated for a fair and equitable tax system through broadening of the tax base and yet reversed two major initiatives that could have reduced space for the black economy.

As a result, the new government had to face backlash from the formal economy that was already under criticism for a massive gas price increase, resulting in increase in the price of all types of bread, roti etc.

Minister of State for Revenue Hammad Azhar showed a willingness to continue with the ban and allow exemptions in hardship cases during the course of the debate on the supplementary budget by the Senate Standing Committee on Finance.

Although a revised scheme is yet to be made public, most members of the senate panel led by PPP Senator Farooq H Naek had recommended and the government team had agreed that widows, pensioners, overseas Pakistanis and cases of inheritance should be exempted from the ban. Likewise, small cars not above 800cc may be considered for exemption.

As a face saving measure and to support some revenue yields, senators from across the party line have endorsed the increased tax on tobacco, import duty on vehicles over 1,800cc engine and withholding tax on banking transactions of non-filers from 0.4 to 0.6 per cent.

Although recommendations of the senate on the finance bill are not binding on the government, it is also customary that the finance minister accommodate some suggestions of the upper house.

The Senate committee’s recommendation to reduce income tax against business income and salaried income to a maximum of 25pc and 20pc respectively instead of 29pc and 25pc proposed in the supplementary finance bill is unlikely to be accepted by the finance minister because of an impact of around Rs35 billion.

The committee’s final recommendations are being presented to the Senate today for onward consideration of the government and the National Assembly for approval.

The Senate committee has also rejected, with a majority vote, proposals in the supplementary budget for reducing tariffs on import of 34 items intended to enhance exports and support local industry when the ministry of commerce and the FBR failed to justify the revenue impact, how exports would go up and local industry would be protected in the absence of any data. The committee believed some vested interest was behind these facilitations.

The senators have also opposed, with majority, to charge revised higher income tax rates for individuals with backdated effect from July 1. Some of them have warned litigation on the ground that until the supplementary budget had been passed by the National Assembly and signed into law by the President had no locus standi in the eyes of the law and the constitution even though the law ministry did not buy this stance.

Published in Dawn, The Business and Finance Weekly, October 1st, 2018