Will this be the Ultimate Tax Amnesty?

Back in May, the government decided to end its latest tax amnesty, which came into effect on Feb 1, 2016. That ambitious amnesty had expected to net one thousand traders, but a disappointing 9,020 came forward contributing Rupees 850 million to the exchequer. Not put off by this the government is back for round two with an offer of 3 percent of the difference between the DC and FBR notified rate.

The latest amnesty comes during a tumultuous period for real estate in Pakistan. First came the amendments to the Income Tax Ordinance in July which saw the market grind to a halt. Many are still angry at the property valuation rates and have lobbied fiercely for another amnesty. This will be the fourth in just three years and this time it is expected to remove at least two-thirds of the black money in the market.

Governments apply tax amnesties to increase revenues from three main sources. First, to claim from the large amount of revenue in the domestic economy that is exchanged in the black market. This has a double effect in that it will decrease future activity in the black market and thus increase the future tax take. Second, an amnesty seeks to recapture large sums that have been illegally transported abroad. The government gently encourages tax filers to take the chance to repatriate illegal money given that there will be no legal punishment. Third, the government aims to get tax from those who unintentionally underpaid taxes but never reported this matter. In this case, taxpayers were afraid to suffer penalties so never came forward, the amnesty offers them a clean slate.

What makes a successful amnesty?

The performance of an amnesty relies on whether people perceive it to be a unique event. Historically, countries that offer tax amnesties on a repeated basis enjoy much less success. In Pakistan’s case, given this will be the fourth in just three years they will need to ensure that this is the last for a very long time and that the rate is considerably better than the previous amnesty. If citizens expect that another amnesty will appear next year they will have no reason to come forward on this occasion. Individuals need to know that this is the final amnesty where they can report or redress an offence immediately. Repeated amnesties ironically increase the frequency of tax evasion; so the onus is on the government to communicate the finality of this amnesty.

An amnesty alone may not be successful without a tightening of future tax regulations. If the chances of detection are expected to increase post amnesty, a taxpayer is more likely to come forward. The public must know that enhanced enforcement mechanisms will make it more likely to be caught in the future and this will convince the public of the government’s resolve to detect future tax offenders.

“The government really needs to get this one right,” said Saad Arshed, managing director of Lamudi Pakistan. “If people think that in six months’ time they will get another chance, it simply will not act as an incentive,” Arshed went on to say.

An example of a successfully executed tax amnesty was by the Irish government in 1988. They gave taxpayers ten months to pay overdue taxes without being subjected to fines and charges or prosecution. More importantly, they increased the number of ‘tax sheriffs’ responsible for enforcing tax collection. They then began publishing the names of people who were delinquent in their tax payments. The government also gave additional powers to revenue commissioners giving them the ability to seize stock and also to freeze bank accounts belonging to tax evaders.

It is clear that the government desperately needs to get this amnesty right and make sure that it is the last of its kind. The tax amnesty will be presented in the National Assembly during the next session with fresh amendments to be proposed to the Income Tax (Amendment) Ordinance 2016.