As we all know, degree of development of any society can be measured from the documentation of its economy. And it is on the basis of this measure that you can predict the life of any society. As the undocumented economy grows, the process of societal decay and consequently national disintegration is accelerated.The undocumented economy is a combination of undeclared income earned through some economic activity over a period of time. It is also due to carelessness of persons, who do not know the advantages and disadvantages of keeping proper records of income that is tax exempt and becomes undocumented with the passage of time.
Business Recorder  has recently published an article on the menace of undocumented economy. According to the paper, the reasons that created such a big size of the undocumented economy include cases of non-declaration of income due to ignorance, fear from harsh attitude of tax collector and low literacy rate. It is also mainly due to the conventional and outdated wisdom of the Federal Board of Revenue (FBR) that retained vast discretionary powers to harass taxpayers despite the introduction of self-assessment schemes that were meant to minimise interface between the taxpayer and collector to avoid harassment.
In the absence of reliable data, it is often said that we have an undocumented economy that is three times the size of white economy and the size of undocumented economy is increasing every year. Efforts have been made to identify reasons of this enlargement of undocumented economy in Pakistan. Some blamed the non-taxpayers and suggested severe actions against them; others blamed the tax collectors as being too harsh and uncompromising, who harassed the genuine taxpayers and advocated for a change in tax administration. However, very little effort was made to identify the weaknesses of tax administration that keep away a common man from registering him as a taxpayer.
The tax structure needs a completely different approach. This should focus on tax reforms and being tolerant to those, who have defaulted in the past. The non payers should be encouraged to bring their undeclared wealth into the productive economy so that their wealth becomes part of the economic activity. This should pave the way for broader size of documented economy. It should provide additional wealth at no extra cost. It would reduce dependence on use various instruments to whiten their undeclared wealth. There is a need for a mutual confidence among the parties to achieve so that the tax structure is reformed that produces the desired results.
Even with various tax amnesties and opportunities to whiten money through different products, we have not been successful to bring enough people into the tax net. It was stated recently in a FBR report that only 2.75 million Pakistanis, or 1.6 percent of the country’s estimated 160 million people, are registered taxpayers Out of these, only around two million people file their returns. “The compliance ratio has always been below. The share of taxpayers to population is low when compared with the few selected developing and developed countries, where the share ranges between 4.7 percent and 86.4 percent.” The report said that in India, the share of taxpayers to population is 4.7 percent, in Argentina 16.5 percent, France around 58 percent. This should be indicative that there is something seriously wrong in our taxation system.
The direct tax collection remained far below from our expectations. Tax reforms efforts since 1990s have shown some increase of the share of direct tax in total tax revenues. During the period 1990 thru 2005, direct tax collection increased from some 17 percent to almost 30 percent of the total tax collection. During the 2010-11 fiscal year, budgetary proposals included revenue from direct taxes of 657.7 billion rupees and revenue from indirect taxes is targeted at 1.12 trillion rupees. The direct taxes amounts to almost 30 percent of the total revenue
There is an urgent need to redouble the tax collection efforts by expanding the tax net and eradicate tax evasion from the system. How that can be achieved has to be analysed carefully by resolving the issue of “Source of Funds” that remains in the minds of both the tax payer and tax collectors alike. This seems to be one of the major factors in the enlargement of undocumented economy that is leading towards economic stagnation, slower economic recovery, rampant corruption in the tax collection system and lower size of the taxpayers. So far the FBR is hesitant to resolve this issue through a clear and well-defined policy. As such the tax elasticity continues to be very poor. With a tax-to-GDP ratio hovering around 10 percent, the country cannot expect to attain a reasonable degree of development and avoid debt accumulation. The FBR needs to act fast to change its tax collection philosophy.
It is not understood by most to know how to keep records of income and expenditures of joint families. How to report deceased’s wealth and share it legally according to law that satisfies the tax collector? Even though that is provable, due to vast discretionary powers of tax collectors, the genuine “source of funds” is rejected and is taxed, and the tax payer is harassed to get illegal money. Why the tax collectors are putting so much emphasis on the “Source of Funds” issue rather than to accept undocumented wealth into the economic system is not understandable. If that economic activity is allowed to carry on in natural manner without asking to prove “Source of Funds”, the economic activity should generate additional wealth, create employment and result in additional payment of taxes, thereby enhancing the government’s revenue. Is it not what the society desires? If that is so, why not adopt new philosophy that suits our economy and bring in greater economic benefits for our developing society.
This philosophy is supported by the economic events taking place world-wide. Capital flowing into the Western countries is growing every year mostly on security grounds, ease of its induction into economic activity through investing it in real estates, bank deposits, capital markets and new businesses due to friendly attitude of tax collecting agencies. Dubai is the recent example where billions of dollars were invested in real estate and other trading and industrial sectors where no one asked to prove the “Source of Funds”. I wish we should have created the same sort of investment climate where no questions were asked to prove the “Source of Funds”.
Switzerland is another example where funds came in from various parts of the world and no questions are asked about the “Source of Funds”. We have our elite class that kept huge funds abroad in banks, bought expensive real estate and carried business activities. This would not have been possible if the question of “Source of Funds” remained in the minds of these people. Had there been an open policy, this elite class would have preferred to keep their funds locally instead of sending them abroad. We are begging to foreigners to invest locally but discouraging locals to do the same.
Let us analyse another situation where agriculture income is exempt from income tax since 1947. If income tax is imposed on agricultural income any time in future, how the agriculturalists would prove their “Source of Funds” for the wealth they have so far created. If confronted with the same question? Will they be asked to summarise their 63-year-old record to establish their entire wealth? Will it be possible to do so? Should we declare their previous exempt wealth into undocumented wealth and drive away the entire wealth from the economic activity or enlarge the size of the undocumented economy?
Those incomes that have been exempted from the tax net for a longer period of time should be dealt with a different manner so that the entire undeclared wealth should automatically fall into the economic activity. If that is not done, would it not amount to wilful effort to keep the undocumented wealth away from the economic activity? Does it not show that FBR has been equally contributory factor in creating the undeclared economy? The recurrent appearance of amnesty schemes and money whitening instruments/modes show that the State is prepared and willing to accept undeclared wealth into the economic activity but is shy to announce openly. Had it been done with an open heart, the economic activity would have grown at a faster rate and there would have been no need to beg for economic aid. Probably, there would have been no need for Kerry-Luger type assistance.

Advertisements