India and Pakistan: Tax Incentive Packages Comparison

Significance and Scope of the Study

Tax amnesties remain a recurring feature of taxation policy in Pakistan. In spite of their often criticized negative aspects, tax amnesties keep appearing every now and then. This paper seeks to examine both requirement and effectiveness of tax amnesty by making a comparison of major amnesty schemes introduced in Pakistan and India in the recent past.

Review of the Literature

There is substantial amount of research on the impact of tax amnesties and their impact on tax compliance. However, no study appears to have been conducted to assess the requirement of such schemes and what makes them effective in terms of achieving results especially in reference to Pakistan. Moreover, there is no comparative analysis made between tax amnesty schemes introduced in Pakistan and India, thus there is a research gap in this field.

Literature has been reviewed where previous work examining the relationship between tax culture and tax compliance has been discussed. Briger Nerré ‘The Concept of Tax Culture’ (2001) includes entirety of all relevant formal and informal institutions connected with the national system and its practical execution in a country specific tax culture which are historically embedded within the country’s culture, including the dependencies and ties caused by their ongoing interaction. Nerre defined tax morale as a term connected with certain ‘willingness-to-pay taxes’, a feeling of obligation to the state.[1] Nerré in ‘Tax Culture: A Basic Concept of Tax Politics’ (2008) has further crystalized the term ‘Tax Culture’. According to him a tax culture specific to a particular country emerges – coined by the tradition of taxation on the one hand, and by the interaction of the cultural values like ‘honesty’, ‘justice’ or also a ‘sense of duty’ on the other hand. The later resembles the tax mentality that consists of the two components of a tax morale and tax discipline and solely aims at the relationship between the taxpayer and the tax state.[2]

Regarding the impact of tax amnesties Herman B. Leonard et al.  ‘Amnesty, Enforcement, and Tax Policy’ (1987) conclude that amnesty serves a useful instrument to offer an opportunity to taxpayers to come clean and go straight.[3] Ronald C. Fischer et al. ‘Participation in Tax Amnesties: The Individual Income Tax’ (1989) recognizing that long term addition to revenue coming from new tax payers brought into the system is likely to be small has nevertheless concluded that amnesties are not a bad idea, as they may serve as a tool to collect revenue sooner at a lower collection cost than it would have been with enhanced enforcement alone. They have concluded that through amnesties the guilt felt by many basically honest taxpayers can be relieved while strengthening tax enforcement is left to deal with ‘hardcore’ evaders. According to them data on the characteristics of tax evasion collected in the process is the most significant positive side-effect of an amnesty.[4] James Alm et al. ‘Amazing Grace: Tax Amnesties and Compliance’ (1990) have concluded that overall level of tax compliance falls after an amnesty. The decline in compliance stems from the behavior of the persons engaged in moderate levels of compliance prior to the amnesty; those who either comply completely or not at all are largely unaffected by the amnesty.[5]

Osman Faith Savacoglu ‘Tax Amnesty with Effects Effecting Aspects: Tax Compliance, Tax Audits and Enforcement Around: The Turkish Case’’ (2011) has concluded that the conventional view that honest taxpayers begin to see tax amnesties as rewards for tax dodgers was true at least in case of Turkey where repeated tax amnesties have adversely affected the level of compliance.[6] Haris S. Luitel et al. ‘Is a Tax Amnesty a Good Fiscal Policy? A Review of State Experience in the USA’ (2013) terms tax amnesties ‘a penny wise pound foolish’ policy that potentially impedes a state’s future progress as amnesties do not collect enough tax revenues in the short run and, in the long run, they have unintended consequences like taxpayers gaming the tax system in expectation of a pending tax amnesty.[7] In Pakistan first amnesty scheme was introduced in 1958 and since then a number of such schemes have been offered.

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