India and Pakistan: Tax Incentive Packages Comparison

Recommendations

In view of the disappointing outcome of repeated tax amnesties in Pakistan and their negative impact on tax compliance, a reappraisal of past experiences of amnesties is required. Core policy and administrative weaknesses need to be identified which lead to the need for tax amnesties. Similarly, strategies need to be formulated to address the core problems, and to find alternative policies that could lead to sustainable improvements in tax compliance.  The following policy interventions are recommended:

  1. Tax amnesties should not be treated as a substitute of improving the tax system structure and improving capacity of the tax administration. Policy makers would do well to avoid temptations of easy fixes through amnesties that produce some short term revenue gains at the cost of long term efforts to reform tax policy and modernize tax administration.
  2. There should be a policy shift towards removal of grounds that justify introduction of tax amnesties. Efforts leading to systematic documentation of economy to control tax evasion and bridge tax gap should be given precedence over resort to tax amnesties.
  3. No stand-alone tax amnesty scheme should be introduced as stand-alone schemes signal lack of political will and weakness of tax administration. Tax amnesties, if considered necessary for revenue enhancement, should be succeeded by structural reform measures aimed at strengthening of tax administrations capacity to cope with tax evasion.
  4. Where the government decides to introduce a tax amnesty scheme it should be ensured that the tax evaders are not rewarded by being offered a lower effective tax rate than law abiding taxpayers.
  5. Instead of repeatedly launching tax amnesties, the government should keep a permanent window open for the tax evaders to join the mainstream taxation without fear of prosecution or penal action. This may include establishing a permanent voluntary disclosure mechanism where the tax evaders may voluntarily offer to pay the tax evaded along with interest at bank rate in exchange of immunity from prosecution and penalty.

Bibliography

  1. ADB ‘Private Sector Assessment of Pakistan’ Asian Development Bank, December 2008, Available at http://www.adb.org/documents/private-sector-assessment-pakistan
  2. Ahmed, Robina Athar and Mark Rider ‘Pakistan’s Tax Gap: Estimates by Tax Calculation and Methodology’ International Studies Programme Working Paper 08-11, Andrew Young School of Public Studies, Georgia State University, Atlanta 2008.
  3. Baer, Katherine and Eric Le Borgne ‘Tax Amnesties – Theory, Trends and Some Alternatives’, International Monetary Fund, Washington DC, 2008.
  4. Bird, Richard M., ‘Tax Challenges Facing Developing Countries’ IIB Paper No. 9 Working Paper Series, Institute of International Business, Joseph L. Rotman School of Management, University of Toronto, March 2008, 6.
  5. Kemal, M. Ali ‘A fresh Assessment of the underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with Formal Econom’ PIDE Workng Papers 2007:13, Pakistan Institute of Development Economics, Islamabad, 2007
  6. Leonard, Herman B. & Richard J. Zeckhauser, ‘Amnesty, Enforcement and Tax Policy’ (Nat’l Bureau of Econ. Research, Working Paper No. 2096, 1986
  7. Nerré, Birger ‘Tax Culture: A Basic Concept for Tax Politics’  Economic Analysis & Policy, Vol. 38 No. 1, March 2008 (http://www.eap-journal.com/archive/v38_i1_11.pdf)
  8. Nerré, Briger ‘The Concept of Tax Culture’ (2001). Available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.6056&rep=rep1&type=pdf
  9. Phua, Stephen ‘Tax Gap: Causes and Solutions’ Indian Council for Research on International Economic Relations, New Delhi 2011
  10. Uchitelle, Elliott, ‘The Effectiveness of Tax Amnesty Programs in Selected Countries’, Federal Reserve Bank of New York Quarterly Review, (1989).

[1] Briger Nerré, ‘The Concept of Tax Culture’ (2001). Available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.6056&rep=rep1&type=pdf

[2] Birger Nerré, ‘Tax Culture: A Basic Concept for Tax Politics’ Economic Analysis & Policy, Vol. 38 No. 1, March 2008.  Available at http://www.eap-journal.com/archive/v38_i1_11.pdf

[3] Herman B Leonard & Richard J. Zeckhauser, ‘Amnesty, Enforcement and Tax Policy’ (Nat’l Bureau of Econ. Research, Working Paper No. 2096, 1986

[4] Ronald C. Fischer, Johan H. Goddeers and others ‘Participation in Tax Amnesties: The Individual Income Tax’ National Tax Journal, vol. 42, No.1, (March, 1989).

[5] James Alm, Michel McKee and William Beck ‘Amazing Grace: Tax Amnesties and Compliance’ National Journal, vol. 43, No.1, (March, 1999).

[6] Osman Faith Savacoglu, ‘Tax Amnesty with Effects and Effecting Aspects: Tax Compliance, Tax Audits and Enforcement Around: The Turkish Case’ International Journal of Business and Social Sciences, Vol.2 No.7: Special Issue – April 2011.

[7] Haris S. Luitel and Gerry J. Mahar ‘Is a Tax Amnesty a Good Fiscal Policy? A Review of State Experience in the USA’ Economic Bulletin, Vol 33, No.1 Available at http://www.accessecon.com/pubs/eb/default.aspx?topic=detail&ID=2

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