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Tax amnesty

September 28, 2012

THE Federal Board of Revenue’s proposed tax amnesty scheme to lure 3.8 million tax thieves into declaring their ‘hidden’ wealth at home and abroad is unlikely to produce the intended results. Slated to be launched next month, it doesn’t appear to be the right route to increasing revenues and expanding the tax base. If the past is anything to go by, the scheme can at best allow tax dodgers to launder their ill-gotten assets by paying a nominal tax on their value at an official gain of a few million rupees. The government is living off heavy bank loans and foreign dole, but the cost that will go into raising such a meagre amount for the economy will be formidable. As is usual, the opportunity will tempt more people, including many honest taxpayers, to cheat the government in the hope of availing another amnesty a few years down the road. This is not how governments can or should increase their revenues. The proposal only indicates a lack of political will to take tough decisions. A government that dithered on its commitment to implement value added tax for fear of a political backlash hardly inspires confidence about its ability to document the economy to boost the tax-to-GDP ratio of less than 10 per cent, the lowest in the region.

The FBR proposal is reflective of the unwillingness of the tax collectors to bring to justice those who avoid paying taxes. Against tall claims by successive heads of the board, the number of people filing tax returns has dropped sharply and more than two-thirds of the government revenue is generated from inflationary, indirect taxes. In the budget for the last fiscal, the government had promised to bring 700,000 wealthy people into the net. More than a year later, the scheme has fizzled out. To improve its revenue collection, the government will have to tax all incomes irrespective of source and revamp tax administration. Amnesty and whitening schemes will only further entrench the culture of tax evasion in the country.