Traders — the only cheats

When it comes to pork-barrel politics, it pays to be small

Does the informal economy comprise only of traders? The recent Tax Amnesty Scheme, designed specifically for the traders, would have you believe so. The intro of the preamble issued by the Q-block — where the finance ministry is located in Islamabad — reads:

“A major segment of national economy is currently undocumented and a large number of traders who are required to file their income tax returns are either persistent non-filers or under-reporting their income, consequently depriving the national exchequer of its due share.

“Therefore, in view of the prevailing culture of massive non-reporting and under-reporting, it is expedient to provide a one-time opportunity to the filer as well as non-filer traders to regularise their tax affairs by adopting a special and simplified procedure for assessment of their tax.

“We foresee that withholding tax on banking transactions will restore to 0.6% after the due date of filing of returns under this VTCS. This will also trigger the urge in the non-filer traders to avail the scheme and file their returns under this VTCS. FBR foresee that more than one million new taxpayers will be added into tax net, broadening the tax base and further contributing to the exchequer.”

Notice how the preamble at the very onset acknowledges that a major portion of our economy is undocumented. Then, immediately jumps on to how traders have been cheating on their income taxes and why it is essential to give these tax cheating traders (not the rest of the tax cheats) a lucrative opportunity to come out clean. Also the prominent mention of 0.6% withholding tax on banking transactions in the preamble makes it evident that the Voluntary Tax Compliance Scheme has been offered specifically to make the traders agree to this longstanding issue.

Back to our original question of why the government felt the need to offer only one segment of the informal economy a tax amnesty scheme while ignoring all the others. It is not as if the traders are the only tax thieves and the rest of Pakistani citizens are honest and truthful about their sources of income and pay the taxman its due share. Take, for example, hundreds of thousands of individual landlords who own to rent a small shop, office or a house. Most, if not all, do not declare this rental income to the taxman. Why shouldn’t these small landlords also be given the opportunity to go through the one-time laundry of amnesty and come out clean like the traders and thereby becoming mainstream tax filers? Is it because unlike the traders this segment is not affected by the 0.6% withholding tax on banking transactions? Not at all. In fact, these hundreds of thousands of small landlords, millions of salaried individuals, countless manufacturers and service providers are all affected by the tax on banking transactions.

Well, the answer is not very difficult. The simplest explanation is that whereas the traders protested publicly on the streets against the tax on banking transactions, the others did not. And Ishaq Dar, being the naive person he is, took the lack of protests by the rest of the segments as a sign of approval for the new tax and hence did not feel the need to lure them into the tax net with an amnesty scheme.

But we all know very well that neither Mr Dar is naive nor the salaried class and the rest of the segments are happy with the new tax. One argument goes that the sheer number of traders makes them a very powerful lobby and were hence given a preferential treatment. But the reality is that they are much fewer in number than the salaried class and the small property owners etc. The dismal science of economics has come up with a theory that gives a more elaborate albeit a bit more complicated explanation of the phenomenon being practised at the FBR. When it comes to pork-barrel politics, it pays to be small. All else constant, small, well organised groups are most successful in interest group politics. Why? Because the costs of whatever they wrangle out of the system are spread over a large, unorganised segment of society, who consequently don’t feel enough pinch to protest against an apparently minor injustice. In our example, traders represent the small group trying to wrangle a benefit for themselves: an exemption from the withholding tax on banking transactions. Due to the sheer volume of the banking transactions by these traders, the impact of this new tax was going to be significant enough for them to feel very strongly about it. The government very aptly realised that this was a make or break issue for the traders and thus announced a lucrative package for this relatively small group to declare their black money and become filers (effectively getting exemption from the withholding tax on banking transactions which applies only to non-filers). This left the very large but unorganised segment of individuals — salaried or otherwise — to bear the 0.6% withholding tax on their banking transactions.

Consistent to our economic theory, this large group did not really care much about this injustice since the average impact on this large group was minimal. The government still gets to raise a decent amount of revenue by adding up these pennies and also via the whitening fee from the traders. A ‘win-win’ situation for the government without really offending anyone.

They say politics is not a spectator sport. The fact that both the teams in our match went on the podium as number one should soon convince others to see the benefits of playing this sport. Here’s to the many more “one-time” amnesty schemes to come.