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Pakistan Seeks IRS-Inspired Fear Factor As Tax Amnesty Flops - ASHARQ AL-AWSAT English Archive 2005 -2017
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Pakistan is preparing to get tough on those who evade tax and who have so far shunned an amnesty program set to finally expire on April 30 after four deadline extensions. In regard of the program, only less than 0.3 percent of Pakistan’s 3 million goods traders have participated in it, well below the 17 percent forecast by the government when it began in January. It has generated only 750 million rupees ($7.2 million) in back taxes, said Haroon Akhtar Khan, special assistant on revenue to Prime Minister Nawaz Sharif.

Khan said that they must change taxpayers’ mindsets, establish a fear factor like the IRS has in the U.S.. While he was referring to the Internal Revenue Service. “Otherwise I don’t think we will be able to increase numbers exponentially” he added.

Sharif has struggled to meet revenue targets under the terms of an International Monetary Fund loan he took in 2013 to strengthen Pakistan’s finances. The push to get more cash from small business owners risks sparking a backlash among his supporters, intensifying pressure on Sharif as lawmakers call for an investigation into whether his family used offshore companies to evade taxes.

Of those who pay taxes in Pakistan, the rate does not reach 1 % of the population, and previous amnesty programs dating back to 1958 have failed to significantly widen the base. The trading community contributes about 19 percent of GDP but less than 1 percent of taxes, according to Pakistan’s Finance Ministry.

As for traders with working capital of as much as 50 million rupees are entitled for the current amnesty program, under which they would pay a levy of 1% on the amount disclosed and be exempt from audits. However those who don’t sign up are liable to pay taxes of as much as 1 percent on turnover.

Pakistan’s Federal Board of Revenue has finished profiling all potential tax payers by collecting data on their spending, traveling and investments patterns, Said Khan who stated that the government will decide on next steps before the end of the month, though he refused to say what penalties are under consideration.

Sharif has made some progress in raising funds with measures including a withholding tax on transactions of more than 50,000 rupees by traders who don’t file tax returns, as well as higher levies on cigarettes and other consumer goods. Pakistan’s tax-to-GDP ratio — among the world’s lowest — will climb to 12 percent in the year through June from about 10 percent in 2012, Khan said.

Even so, Sharif is likely to fall short of the 3.1 trillion in revenue he targeted to shrink the budget deficit to 4.3 percent of gross domestic product from 5.37 percent. Some steps have also faced resistance: the withholding tax was halved from a proposed 0.6 percent after nationwide strikes, while critics say his latest levies are spurring a shadow economy.

“They have done stuff that is encouraging, stuff that nobody has done before, but they need to do a lot more,” said Azam Faruque, chief executive officer at Cherat Cement Co. “We need to bring people into the tax net and it’s absurd what people get away with.”

The government needs to improve its tax collection systems and shouldn’t target any particular community, said Ashraf Bhatti, president of the traders’ body All Pakistan Anjuman-e-Tajaran. “You have got to enforce this system across the board, collect taxes from everybody,” he said. “If you don’t then I don’t think it’s going to be successful.”

Sharif’s government this month announced the formation of an independent commission that will investigate whether his family did anything illegal in setting up offshore companies. Sharif said his children have interests in at least two companies based in the British Virgin Islands that were disclosed as part of the “Panama Papers” leaks this month, but has denied any wrongdoing.

Khan, an economist at IGI Finex Securities Ltd. in Karachi said that Panama leaks is another nail in the coffin and will deter people even more to join the tax system. Adding; “People will think now that if government officials aren’t paying taxes, then why should we?”