Jun 082008

Tax net will thus be expanded

Shafqat Ali

ISLAMABAD: The government aims to whiten over $77 billion worth of black economy through an amnesty scheme to be offered in the national budget for the fiscal year 2008-09, official sources said.

“There is around $80 billion worth of black economy and if those keeping such undeclared assets or cash cooperate with the government they can whiten the assets by paying 2-4 percent of the total amount to the government,” a senior official of the finance ministry told The Post.

“If all the black assets owners do this we can zero down the illegal businesses and also enhance the tax recoveries,” said the official.

“For the time being if we can whiten all the black economy as we intend to do, we will get automatic revenue of over $3 billion which we can spend on development of the country,” the official said.

“The amnesty scheme will be announced in the budget and even if we can whiten half of the estimated target, we will get a lot of money plus we will include those people (black money owners) in the tax net,” he said.

He said the proposed amnesty scheme would make it mandatory for the new taxpayers to file income tax returns for at least five years.

This might be done to ensure that a person should not escape on whitening of un-declared assets. A specific period would be announced for all such persons availing amnesty scheme to regularly file returns.

The filing of returns might be compulsory irrespective the taxpayer is earning or not. The scheme would be offered to be new taxpayers to legalise their all kinds of assets including property, cash etc on payment of the said amount.

The proportion of black economy has been on the rise in Pakistan since 2000-01, as it currently stood at 20.3 percent against 16.5 percent in 2000.

The Federal Board of Revenue (FBR) is currently preparing options for the government to introduce a new scheme in the budget for 2008-09, for converting the black economy into white through normal economic activities.

The mid-term review of MTDF (2008-2010), approved by an NEC meeting chaired by Prime Minister Syed Yousuf Raza Gillani recently, reveals that there was a fall of 51.6 percent in GDP under the black economy since 1960.

The black economy turns out to be at its peak during the early 1960s, when the corporate and personal income tax rates were high.

The corporate income tax rate was 30 percent including 30 percent super tax during that time. This (aggregate corporate income and super tax of 60 percent) rate dropped to 40 percent during the late 1980s.

Likewise, the maximum personal income tax rate was 75 percent during the 1960-64 period, which was the reason for the black economy to remain well above 30 percent of the GDP during the same period.

The black economy kept declining during the 1965-75 period, when this rate was brought down within the 60-70 percent range. Furthermore, this rate was 56 percent during 1980-1986, later brought down to 39 percent in 1988 and subsequently to 28 percent in 1993 – the effect of which is consequently reflected by the shrinking black economy.

The black economy as a percentage of GDP declined by nine percentage points in case of both currency ratio and currency bearer bond equation during 1996 and 1997.

The corresponding decline in tax evasion as percentage of GDP was 39 percent and 32 percent, respectively, for both methods used.

The black economy remained relatively high during the early 1990s at around 26 percent of GDP. During that period, tax-to-GDP ratio was almost stagnant at 13 percent and the rate of return on deposits was falling – a disincentive to withdraw from activities related to the black economy

Nevertheless, during 1996-97, tax-to-GDP ratio dropped to 12.7 percent after touching its peak at 14 percent, coupled with the increase in rate of return on deposits from 6.4 percent to 6.8 percent. Both these factors, especially the tax reform effect, played a significant role in slashing the black economy.

The further decline of tax-to-GDP ratio during the 1999-2000 period, which does not appear to have great impact on the size of the black economy, was actually the result of re-basing of the country’s GDP.

On the other hand, the sharp decline of rate of return on deposits from 1998 onwards, acted as a hurdle in reducing the size of the black economy.

Roughly, the inclusion of bearer bonds increases, on an average, the black economy as a percentage of the GDP by five percentage points each year. Bearer bonds were introduced during the mid 1980s to promote savings.

Later on, they became a handy medium of exchange due to their limited physical quantity requirement for any transaction as against currency and also because of their hassle-free acquisition.

The annual compound growth rate of currency in circulation and bearer bonds during the last two decades remained almost the same at 12 percent.

Also the size of the black economy has slightly increased from 2000 onwards. This is, perhaps, due to the reduction of rate of return on deposits, which declined by more than 30 percent during the 2000-2003 period, revealing the weak stance of the monetary policy.

During the same period, the effective coverage of indirect as well as direct taxes was increased. This brought some of the untaxed sectors into the tax net, causing the tax-to-GDP ratio to increase slightly by 0.26 percent.

Despite the fact that the black economy as a percentage of the GDP has decreased, the annual compound growth rate of the black economy during the sample period remained more than 11 percent.

At disaggregated level, this growth remained at two percent during the 1960s, 17 percent during the 1970s, 15 percent during the 1980s and 13-20 percent during the 1990s and onwards.

Similarly, tax evasion grew at the rate of 12 percent. This growth remained at five percent during the 1960s, 19 percent during the 1970s, 16 percent during the 1980s and 11 percent during the 1990s and onwards.

Estimates of the black economy cannot be taken as precise measures. They can, nevertheless, be effectively used to deduce broad trends and directions.


Source: The Post, 8/6/2008

 Posted by at 1:18 pm

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