IT is never a pretty sight to see a government bow before rackets and vested interests. That is precisely what our rulers are doing by rolling back the various penalties that had been added in preceding years for those who failed to file tax returns. While speaking at an event in Karachi, Finance Minister Asad Umar told his audience that the withholding tax on cash withdrawals by non-filers of tax returns would be withdrawn in the next budget since it was leading to a higher cash-to-bank deposit ratio, or CDR, in the country. A rising CDR is a sign that more and more transactions are being conducted in cash, and less and less of the country’s money supply is entering the banking system. The minister is right to be concerned about a rising CDR, but surrendering to those who insist on remaining outside the tax net is not the way forward if the problem is to be addressed.

Early in its tenure, the PTI government started chipping away at the edifice of penalties that the previous government had attached to the transactions of non-filers of tax returns. The minister sought to reverse a prohibition on the purchase of new cars and property by non-filers, then quickly backed away from his stated purpose in the face of widespread criticism. Nevertheless, he went ahead with the move at the time of the next mini budget in January. That reversal was done in the name of reviving sales of new cars that had plummeted since the prohibition went into effect at the beginning of this fiscal year. The second round of reversals is being carried out in the name of controlling the CDR. One wonders what is next.

The idea of having an active taxpayer list was to enable such penalties in the first place. By ramping up the prohibitions, the idea was to slowly choke off the space for non-filers to operate, while supplementing the penalties with incentives to encourage tax filing. That effort now lies in tatters. Mr Umar should present his own vision for advancing the documentation of the economy. For the moment, the only effort under way for this purpose is an aggressive recovery drive by the FBR, where notices are served on high-net-worth individuals and some are proceeded against with vigorous action, including imprisonment. Such moves only serve to further frighten those who are already complying, since trust in the capacity and integrity of tax officialdom is extremely low in the country. Prevailing common sense and accumulated experience tell us that any good documentation drive should target those who are refusing to file, and seek to minimise contact between the tax collector and the taxpayers. At the moment, it seems that the government is peddling backwards on this; the harm done will take many years to repair.

Published in Dawn, March 20th, 2019