The rich and mighty are confident that the laws and courts will always be on their side. After all, why should they pay taxes when they can legally hide income and whiten their assets?
Efforts to tackle the twin menaces of black money and tax evasion have always failed in Pakistan. Numerous amnesty schemes lacking consequential strict action for not availing the same have miserably failed. Many Press reports suggest that the same will be the fate of the two schemes – Foreign Assets (Declaration and Repatriation) Act, 2018 and Voluntary Declaration of Domestic Assets Act, 2018 – which are going to expire on June 30, 2018.
In the fiscal year 2016-17, Federal Board of Revenue (FBR) collected Rs 3.36 trillion against documented GDP of around Rs 29.8 trillion. All indicators confirm that the size of the parallel economy is equal to the recorded GDP, if not more. If we take this into account, FBR collection does not amount to more than 6 percent of the real GDP.
The parallel economy has grown to be so large due to many factors, the most dominant of which is poor fiscal policy. Instead of dealing with this as a vital issue, successive governments – civil and military alike – have pardoned or appeased tax evaders through various laws and amnesty schemes.
As a consequence, we have an ever-growing informal economy. Many a time, it has been suggested by experts that instead of announcing periodic tax amnesties, the government should ask all Pakistani citizens to take benefit of a flat rate of 10 percent tax and file returns for past as many years as they want and no penalty or additional tax would be levied. This facility, however, should not be available to public office holders as defined in the NAB Ordinance, 1999, and for proceeds of crimes.
The large size of the undocumented economy has much to do with the way taxes have been administered for the past many decades. Successive governments have reduced their reliance on direct taxes, and increased their reliance on indirect ones. This has allowed the rich to amass enormous wealth, without paying any income tax
In the wake of suo moto action of Supreme Court (SC) on February 1, 2018, the outgoing (PML-N) government promulgated two Presidential Ordinances to offer amnesties for foreign and local assets. The SC refrained from validating or rejecting it. The matter of unlawful outward remittance of funds, stashing of assets abroad and flight of capital remain big challenges for which no ready solutions are available. The SC also hinted at establishing a permanent think-tank to guide the government. But the fact is that no government has ever taken interest in solving this problem. This is primarily a political issue, which cannot be solved without the will to crack down on ill-gotten wealth. The rich and mighty are confident that the laws and courts will always be on their side. After all, why should they pay taxes when they can legally hide income and whiten their assets? The question we must ask here is, why does Parliament approve and pass such undesirable laws?
A story in a notable Pakistani English newspaper published on September 4, 2015 testifies to this. According to the story, once Special Assistant on Revenue to Nawaz Sharif and his successor Shahid Khaqan Abbasi, who was elected Senator during the last elections, was seeking refuge under Protection of Economic Reforms Act, 1992 for remittance of Rs 700 million for not disclosing its source. Both the FBR and NAB obliged him to close the matter. Even the Supreme Court did not take cognizance of his case. When a Senator can avoid inquiry into sources of funds why should ordinary businessmen come forward to declare hidden assets?
The non-disclosure of assets held abroad and inside Pakistan by rich and influential persons, many of whom possess dual nationalities, is a serious matter. There is a law which clearly states that public servants cannot hold dual nationalities or marry persons with a foreign nationality without permission. But strangely, a contrary observation came from the apex court the other day that it only wanted to know their number and then suggest the concerned quarters to legislate as no law exist to prevent them from obtaining foreign nationality. The stashing of assets abroad and having dual nationality are interlinked. On both the issues, suo moto actions ended on mere “suggestions”. It confirms that nothing will change in this so-called land of the pure as long as elitist structures persist.
The large size of undocumented economy has much to do with the way taxes have been administered for the past many decades. Successive governments have reduced their reliance on direct taxes, and increased their reliance on indirect ones. This has allowed the rich to amass enormous wealth, without paying any income tax. Pakistan has lost billions required for investment and the betterment of society. Chances of the SC declaring such laws to be in violation of citizens’ fundamental rights have also diminished.
While the rich and mighty get away with evading taxes and acquiring the services of crafty and expensive ‘tax advisers’, the common people are discouraged to make compliance with tax laws because they are highly complicated and entail cumbersome procedures. Even the educated class finds it difficult to comprehend, follow and observe tax laws and procedures.
There are over fifty five withholding tax provisions. Apart from salaries, dividends and payments to non-residents, all others should be abolished. Income Tax should be collected on real, not presumptive income or on transactions. Given the present level of inflation and high cost of living, the minimum threshold of income should be Rs 1, 200,000 where neither income tax is to be paid nor returns need to be filed. Though the Finance Act 2018 has given relief to individuals in tax rates, no corresponding reduction is provided in withholding taxes. Anybody earning income of Rs 400,000 or more is yet to file tax return and wealth statement. No punishment has been meted out to confirmed tax evaders, nor has there been any effort made at the grass root level to educate the public about their tax obligations. This is despite the fact that the law requires that tax officers counsel and guide the taxpayer with respect to his duties and rights.
Under the prevailing circumstances, it is imperative to devise a tax system that would ensure voluntary compliance, boost businesses, ensure transparency, allow markets forces to flourish with responsibility and fear of accountability, and at the same time help generate substantial revenue for governments to function without borrowing, thus fulfilling all responsibilities to the citizenry.