By Prof. Dr. Khawaja Amjad Saeed
Feb 21 - 27, 2000
The Chief Executive of Pakistan, on December 15, 1999 announced tax amnesty scheme. Tax evasion has been rampant in Pakistan since a long time. This paper reviews need to tackle tax evasion, presents Government Tax amnesty scheme, summarizes the declarations of black money in the past, sums up canons of taxation of Adam Smith for developing a sound tax system, highlights budgetary policies of Pakistan, identifies tax evasion sectors and suggests a strategy for tackling tax evasion in our country.
Tax evasion is a global phenomenon. Tax collection is based on the theory that not many people wish to pay taxes. Therefore tax collection system must be developed in such a manner as will ensure flow of taxes into the coffers of the State to enable it to not only meet operating / running expenses but also finance development expenditure. Our position in Pakistan is a difficult one. The public need to be educated about financial security aspects of the country. Non-payment of taxes, enjoying the luxury of liberal exemptions available in laws and deciding to avoid paying legitimate and due taxes is not in the interest of stability and integrity of the country.
At present, the Government of Pakistan is in big trouble as financial cushion is not available to fully meet the operating and development expenses as is apparent from table No. 1.
Financial Needs and Availability of Finance Resources 1999-2000
Needed Rs. billion
1. Recurring Expenditure 526
2. Development Expenditure 116
Less: Available 423
The above shortfall necessitates borrowings (at home and abroad). This creates tremendous pressures on the recurring budgets in the shape of debt servicing and cripples economic sovereignty of Pakistan. We cannot afford this luxury any more. Therefore, there is a need to properly understand tax evasion dimensions and develop a sound strategy to tackle it for adding strength to financial frontiers of our beloved country.
Government tax amnesty scheme
The Chief Executive of Pakistan, in his historic speech delivered on December 15, 1999, announced a tax amnesty scheme on the following lines:
1. On truthful disclosure of all tax evaded assets, a payment of only 10% as tax will allow people to bring these assets onto their books. This amnesty will be available until March 31, 2000.
2. The Government has decided that no black money whitener schemes will be allowed in the future. However, the Chief Executive of Pakistan wanted to assure that the immunities, protection and exemptions on existing investments, deposits, bonds, foreign currency accounts etc. will be fully honoured. The Finance Minister is expected to provide further details in this respect.
Tax evasion: In retrospect
Table 2 presents an abridged position of declaration of black money in the past in the history of our country. These declarations were made thrice in the past. The announcement of 1958 related to Ayub regime. The 1969 event occurred in Yahya Khan's regime. The 1976 event was in the Zulfiqar Ali Bhutto's regime.
Year Amount Pertinent Comments
(Black Money declared)
1. 1958 1,350 million Rs. 1,120 million relate to areas which constitute Pakistan (excluding East Pakistan which later became Bangladesh).
2. 1969 920 million Rs. 780 million relate to areas which now constitute Pakistan (excluding East Pakistan which later became Bangladesh).
3. 1976 1,500 million Rs. 270 million was paid as tax on declared income on August 31, 1976.
Canons of taxation
Guidance has been provided by economists and the scholars in the past for proper payment of taxes. These have been popularly known as canons of taxation. A summarized version of these is given below:
Adam Smith's canons of taxation
Adam Smith's contribution to economic theory is regarded as classic. His statement of canons of taxation has hardly been surpassed in clarity and simplicity. Four canons of taxation are as under:
A: Ethical Aspects
1. The Canon of Equality
This is based on the following concept:
"The subjects of every state ought to contribute towards the support of the Government as nearly as possible in proportion to their respective abilities that is in proportion to the revenue which they respectively enjoy under the protection of the state".
This canon embodies the principle of equity or justice. It lays moral foundation of the tax system. Adam Smith, writing in his renowned book namely, Wealth of Nations, stated: "It is not unreasonable that the rich should contribute to the public expense not only in proportion to their revenue but something more man than that proportions".
Accordingly the tax will be in proportion to the ability to pay.
B: Administrative Aspects
2. The Canon of Certainty
The Principle of Certainty is very important and can get reflected in reality by implementing the guidance provided in the following statement of Adam Smith: "The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person. Where it is otherwise, every person subject to tax is put, more or less, in the power of tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of each aggravation, some present or perquisite to himself".
Certainty is needed not only from the point of view of the tax-payer but also from that of state.
3. The Canon of Convenience
Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.
4. The Canon of Economy
Every tax ought to be so contrived as both to take out and to keep out of the pocket of the people as little as possible, over and above what it brings into the public treasury of the State.
Some later writers added a few more canons to Adam Smith's four described above. Among these are: Elasticity, Flexibility, Simplicity and Diversity.
A good tax system should comprise taxes which conform to the above canons of taxation.
Several cornerstones of budgetary policies were announced in the past.
Table 3 sums up pertinent aspects:
Focus Operational Details
Productivity Capacity Optimal utilization of productive capacity and maximization of agricultural and industrial production to boost exports.
Revenue Base Ability to meet all the expenditure and a substantial part of the development cost of both Federal and Provincial Govemments from revenue resources.
Investment Maintenance of a favourable investment climate, encouraging investment and promoting savings.
Taxation Structure Streamlining taxation structure and administration of revenue collection departments to put a check on tax evasion.
Social Justice Advancement of concept of social justice by putting a check on concentration of wealth in a few hands, and the building up of a strong middle class.
Five Year Plans Practically shaping the guiding principles enunciated in various Five Year Plans with emphasis on resource mobilization.
These remained as ideals without getting crystallized in reality.
Tax evasion sectors
There are three sectors which are not appropriate tax paying and not contributing to income tax in Pakistan. These are: transporters, traders, and agriculturists. Transporters earn considerable money but evade payment of taxes. Traders enjoy the luxury of no documentation or poor documentation. Consequently there is a calculated move on their part not to pay income tax. Agriculturists enjoy income tax holiday for ever under the Income Tax Ordinance, 1979. Since the Assemblies have been beefed up with landed aristocracy, no effort has been made by them to bring the income earned from agricultural into Income Tax net.
For any big Government the above three sectors pose a challenge. Who will tax them?
The present Govemment has made a good start to include agriculture income for income tax to be administered by Provincial Governments as authorized in me 1973 Constitution of Pakistan. We wish to see its true implementation.
Tackling tax evasion
Comprehensive and concerted efforts are needed to tackle tax evasion. Tax Laws should be simplified. Public needs to be properly educated. Tax machinery is required to be reoriented for developing capability, capacity and credibility. Government ought to be firmly determined for tacking tax evasion. A momentum needs to be built whereby tax rates are reduced and tax base is broadly widened. Number of Taxes be reduced. Collection drive be accelerated. Domestic resource mobilization through revenue collection needs to be accelerated. A target-oriented program for tacking tax evasion is the crying need of today.
1) There is a need to educate people in Pakistan for developing tax culture.
2) Tax Evasion should be given as priority number one monster and a strategy be worked out to effectively tackle it.
3) Income Tax rates should be substantially reduced with quantum jump in the number of income tax assesses.
4) All exemptions available under the Second Scheduled annexed in the Income Tax Ordinance, 1979 should be withdrawn and subjected to income tax at declining rates.
5) Steps suggested at 4 above be extended to the Wealth Tax exemptions also.
6) Tax structure be simplified to encourage potential assessees to deposit the income tax into the coffers of me sate.
7) A national movement must be launched with the slogan: Let us all pay income tax.
The author is Dean: Executive programms, Punjab College of Business Administration, Constituent College of Mohammad Ali Jinnah University.
President, Institute of Cost and management Accountants of Pakistan.
Member Governing Council, International Federation of Accountants.