Pakistan’s black economy: The case of curbing the non-filer

Published: October 1, 2018
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Instead of rolling back disincentives to the non-filers, the government should keep the curbs on non-filers to buy vehicles and property. PHOTO: SHUTTERSTOCK

As the government is mulling over sustaining the curbs on non-filers to buy automobiles and property that costs over Rs500,000, the time is ripe to make a case against the non-filer category. Any scheme that is directed towards eliminating this category will undoubtedly face a strong backlash from the non-filers.

They would probably argue that making everyone a filer is unnecessary in a country where 24.3% of the population is living below the poverty line; it would introduce unwanted hassle of documentation for businesses and it would waste their man-hours doing tax calculations. Moreover, it would incur costs of hiring a tax consultant. More regulation means more government interference and hence, it would be bad for businesses.

Yes, it would be bad, but only for the black economy. If you do nothing wrong, you should have nothing to hide. They will question the capacity issues of the Federal Board of Revenue (FBR). Their website usually crashes when the deadline for return submission approaches; and that happens when we have only 1.238 million filers out of a population of roughly 220 million people. Imagine 80 million people filing returns. FBR servers will breathe their last under such circumstances.

I will not deny that these are valid concerns and I don’t suggest that the non-filer category be immediately abandoned. However, there should be a policy in place to help its gradual phasing out. But the question is, why go through all this trouble in the first place?

When designing any tax system, the government should consider making it not only efficient but also equitable. An equitable tax system requires it to be progressive. In simple terms, the more affluent you are, the higher percentage of tax you pay from your income. As opposed to that principle, the burden of tax falls heavily on the lower or middle class in the case of indirect taxation. If we look at the fiscal targets of the budget presented in April, we can see that direct taxes amount to Rs1.7 trillion while indirect taxes are at Rs2.7 trillion. We tend to tilt heavily towards indirect taxation due to a lack of documentation, leading to direct tax evasion.

Hence, instead of rolling back disincentives to the non-filers, the government should keep the curbs on non-filers to buy vehicles and property. In the next fiscal year, the government could add a mechanism through which every person who opens up a bank account would have to be a filer. Those who already have bank accounts must file their returns, otherwise their bank accounts will be frozen.

The government should implement a system that would resolve three issues at once: cost of tax accountants, low number of tax returns, and corruption. The key is to make FBR replicate the model of the National Database and Registration Authority (NADRA). The identity card issuing authority introduced a fast-track system by which one could pay a bigger amount to expedite the card issuing process. The payments were linked to bonuses of the employees. More transactions meant more salary. As a consequence of this system, average salary at NADRA increased by 131% during a period of 2008 through 2013.

Similarly, filing of returns is a cumbersome process and it can be accelerated by giving FBR employees incentives; they can get bonuses by filing returns. Although there are similarities, there is one difference: national identity cards are absolutely necessary for day-to-day functioning of individuals in our country but one can easily get away without filing a return. But if we introduce curbs that make it necessary to file a return, many will make their way to return filing cells. The staff may charge a minimum fee, such as Rs200 to file a simple return. There could be fee exemptions for senior citizens and disabled people. This way the government will incentivise the workforce to avoid corrupt practices and earn bonuses. It will also mean more documentation, and will save the general populace from costs of hiring tax accountants.

The minister of state for revenue, Hammad Azhar, said the government agrees with the previous government’s policy of banning purchase of vehicle and property by non-filers and they want to further refine the system. In the same vein, Information Minister Fawad Chaudhry announced that the government is going after top 100 tax defaulters. He also said that the government would not be blackmailed at the hands of mafias.

However, we still have a long way to go in order to completely stifle rent-seeking mafias. The first step against them would be to retain these curbs and gradually tighten the noose around them. At this point, appeasing the non-filers by giving them a free hand to purchase assets without filing tax returns will not benefit the government in the long-run. I hope better sense prevails and those restrictions are retained.

Ali Raza Gilani

Ali Raza Gilani

The writer is a civil servant who can be found on twitter @AliRazaGilanii (twitter.com/AliRazaGilanii)

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • Fahad Adil

    those people who fall under poverty line does not have money to buy car or property. this is simple requirement for them who does not have to hide any thing. It only require 3000/- for filing a tax if person is uneducated and if some one is educated, can take help from friend or read it self available on website. i can understand on automobile that may be utility for certain families however purchasing property should be restricted with filer.Recommend

  • Shakir Lakhani

    Sir, I wonder how you can write something like this openly while still being in government service. Perhaps you have taken permission from the government. However, being a civil servant, you have undoubtedly heard that there is something called the Constitution, which unambiguously says that criminals should be punished. Make no mistake, those who evade taxes are criminals and deserve punishment. If you allow them any latitude, they will never become tax filers, and will always evade taxes. The property sector alone has Rs. 7 trillion black money parked in it, and has resulted in the common man unable to buy a house for himself. Please do not advise leniency for tax evaders, they should be punished severely.Recommend

  • Buddy

    Buddy kindly read the article. No where in the article does the writer suggest that those who don’t pay taxes should be shown leniency.Recommend

  • Sarmad Hassan

    1.283 million people are giving tax out of 220M! What a mistake bro? Do a baby born today has also to give tax to you? come on, talk on real basis. A lot of people are giving indirect taxes, what about that ? Just saying people are not giving tax is itself a myth.Recommend

  • http://batman-news.com Sam Villa

    Well said, why isn’t Zarar Haider the wallet thief in jail?!?! In the US, UK, Western Europe he would have been arrested on the spot.Recommend

  • bozo

    please read the article first. it seems like you have missed the author’s pointRecommend

  • ABKhan

    The solution is very simple if someone is interested sincerely. If government abolish all indirect tax from filers and keep them for non filers only. Most of the people will start filing. Currently both filers and non filers have to pay indirect tax with little difference.Recommend

  • ABKhan

    Exactly, the quote the number of people filing as the number of people paying tax. In almost all jobs, the tax get deducted at the source but many of them dont file, which doesn’t mean they are not paying due taxesRecommend

  • Syed Masood

    This way could be people with black money by either find an alternative path to do business or money laundering. Despite a fact, right never comes late, we should legalize all bank accounts without becoming a filer and investigate the accountability to freeze or open accounts on behalf of CNIC or Resident permit cards that could suppose to be integrated with several system bodies like NADRA, FBR, SBP etc.Recommend

  • Helper

    1.283 M were filers. He has written categorically thatRecommend

  • numbersnumbers

    All note that democratic governments that are transparent can list what income group pays what percentage of direct taxes! All note that direct taxes are very difficult to avoid!
    This is unthinkable in Pakistan since direct taxes are only for the little people!Recommend

  • LS

    Employers don’t cut TDS when they pay cash, (most of pakistani economy is cash based) everyone tends to avoid paying taxes. Anyone who is paying TDS usually files taxes because TDS is much higher than the actual amount due because of various tax saving schemes people enroll into like provident fund etc (Not sure if that applies in pakistan).Recommend

  • Haris Younis

    Aren’t non-filers paying more in with-holding tax?Recommend

  • ABKhan

    I have worked in six different organizations in Pakistan so far, not a single gave cash in hand to employed and all deducted tax at source. I didnt file tax returns and I know 90% around me didnt for many years even though it was TDS. Could you please provide source that most companies do not do TDS in Pakistan?Recommend

  • LS

    If you read my comment again, I specifically call out “TDS for cash based salaries). If you are not filing taxes after TDS. You are leaving money on the table which is YOURS because TDS is usually at the higher rate.Recommend