Tax policy: all carrots no sticks

The government has decided to waive off a tax penalty along with mandatory audit provisions for those filing their annual returns of previous years. The Federal Board of Revenue had on Nov 14 issued audit notices to over a million late filers who had submitted returns for tax years 2015, 2016 and 2017. They were asked to pay a Rs20,000 penalty or higher taxes for automatic closure of audit proceedings under Section 214D of Income Tax Ordinance 2001.

Section 214D was deleted from the Income Tax Ordinance 2001 under the Finance Act 2018. The new government had said it had decided to do away with the section to avoid “undue hardships” faced by new taxpayers and to facilitate the process of broadening of tax base. The current relief provided to late tax years also seems to be in accordance with the facilitation policy implemented by current government.

Good measures being taken by the authorities in order to build rapport with tax filers are a constructive exercise, but caution is advised. Taxmen do not enjoy the public’s love all over the world and for good reasons. Some pressure tactics must be adopted by the FBR and finance ministry in order to coax people into paying tax, which no one wants to, but it is their duty as responsible citizens.

Relying on ease of collection rather than on reforming the inequitable, unfair and anomalous tax structure; thus, to raise revenue successive administrations have relied on raising taxes on the already taxed. The recent rise in direct tax collections is attributable to levying of withholding tax on every transaction within the economy in the same manner as is done with sales tax with no nexus or relevance to income offered for tax. Carrots are all well and good but an efficient administration should also carry a big stick.