India and Pakistan: Tax Incentive Packages Comparison

Introduction

A country macroeconomic policy and constant economic growth are mainly influenced by its fiscal and taxation system. Numerous developed and developing countries have resorted to tax amnesties. Tax revenues are the most crucial source of governments’ incomes. In almost all the economies there always remain undocumented sectors or individuals which operate outside the tax net. Tax amnesty is considered a tool to get additional revenues in the short term, and achieve tax compliance by cultivating a better tax culture in the long run. However, Tax amnesties are generally viewed by the skeptics as a convenient policy tool for the governments to raise revenues in the short run which can be significant in some cases. The additional revenue becomes most desirable in times of financial crises when revenues are unable to meet the rising expenditures. A Tax Amnesty program allows individuals or firms to pay taxes without being subject to some or all of the legal penalties that the discovery of tax evasion normally entails. Tax amnesty is a one-time opportunity for a person, possessing undisclosed (foreign or local) assets and/or income, to whiten such assets/income by paying a certain percentage on the gross amount thereby waiving interest, penalties and criminal proceedings applicable on previously undisclosed assets/income or unpaid taxes. Theoretically, tax amnesty schemes, in the medium term, may also broaden tax base by bringing the tax evaders into the tax net and thus improve tax compliance. Further it is assumed that revenue is immediately raised through tax amnesties without changing tax rate and base leading to an equitable taxation as taxes collected from tax evaders reduce the disparity in the effective tax rate of previously tax evaders and tax compliant taxpayers.

International experiences of tax amnesties however show that most of the perceived advantages of tax amnesties are exaggerated. The criteria used for measuring the success of a tax amnesty scheme is generally the immediate revenue gains and not the long term impact that amnesties may have on tax compliance and taxpayer behaviour. Significantly, whatever the short term revenue gains achieved are offset by subsequent reduction in taxpayer compliance as a result of the loss of credibility of the tax administration. Behavioural studies suggest that apart from the loss of credibility the tax evaders tend to anticipate another tax amnesty scheme and perceive tax evasion to be less serious.

Instead of temptation to use tax amnesties for immediate additional revenues, alternate policies and strategies, which are robust and self-sustainable, can be used to raise tax revenues. These strategies can focus on weaknesses in a tax system which allow tax evaders to remain outside the tax net. Removing such weaknesses would improve efficiency of tax administration to deal with tax evasion without resorting to tax amnesties.

Moreover, tax amnesty scheme is required to be used as a rare event whenever circumstances exist and it needs to be coupled with strict enforcement measures in order to make it effective.

Statement of the Problem

Tax revenue is vital and main source of public revenue to run governmental functions. Tax amnesty is one of voluntary compliance approaches to increase tax base and tax revenue. Pakistan has introduced number of tax amnesty schemes since 1958.  Merits and demerits, success and failure of various tax amnesty schemes has remained debatable. The government is, therefore, grappled with the challenge to foresee effectiveness of a tax amnesty scheme before introducing it. Impact of such amnesty schemes on development of a better tax culture and their impact on economic performance is worth looking into.

The aim of this research is to analyse how effective Tax Amnesty schemes can be by making a comparison between major Tax Amnesty Schemes introduced in India and Pakistan during the last decade.

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