INDIVIDUAL RESEARCH PAPER

TAX AMNESTIES – IMPACT ON DEVELOPMENT OF TAX

CULTURE

99th NATIONAL MANAGEMENT COURSE

NATIONAL MANAGEMENT COLLEGE, LAHORE

By

NAZIR AHMAD SHORO

Inland Revenue Service

A Paper submitted to the Faculty of the National Management College, Lahore in partial
fulfillment of the requirements of the 99th National Management Course.

The paper is the end product of my own efforts, research and writing and has not, in whole or
in part, been submitted elsewhere for assessment and its contents are not plagiarized. The paper
reflects my own personal views and is not necessarily endorsed by the faculty or the College.

Signature…………………

Date: January 15, 2014

Paper supervised by:

Mrs. Seemi Waheed, CI
 Preface

Tax amnesties is a subject that always remains current. There is always a tax amnesty open
somewhere in the world. During research for this paper a new scheme was announced in
Pakistan through SRO 1065(1)/2013 which is in fact a package of amnesties. Pakistan is among
the countries where tax amnesties have been repeatedly offered. However the impact of tax
amnesties on Pakistan’s tax system has not been assessed. More astonishing is the fact that
except for the total amount of revenue raised through each scheme no other data in respect of
the previous amnesty programmes is available with Federal Board of Revenue (FBR). In the
absence of relevant data, especially regarding the level of participation in the individual
amnesty schemes, the new taxpayers who joined the tax base as a result of amnesty and the
compliance level in the post amnesty periods, results of amnesty programmes are difficult to
be evaluated. Absence of this crucial data in FBR shows that the only benchmark the policy
makers in Pakistan use to anticipate outcome of a proposed amnesty scheme is the short term
revenue gain. However absence of relevant data makes research in Pakistan’s context quite an
uphill task.

Nevertheless despite data deficiency I have completed the research by using the scant data
available and this became possible only due to guidance and directions of my faculty advisor
Mrs. Seemi Waheed, CI. This is however just the beginning of research on this particular
subject in the context of Pakistan and due to data deficiency some gaps may have been left in
the research. I am hopeful that research would be carried forward on this subject and remaining
aspects of the subject would be covered. I am extremely thankful to my faculty advisor Mrs.
Seemi Waheed, CI for her guidance and constant support without which this work would not
have been possible. I also wish to acknowledge invaluable guidance of Late Shahid Nasim, DS
at initial stages of this research. I am also grateful to fellow participants of 99th NMC for useful
discussions during various stages of this study. Finally I may also express my gratitude to Ms.
Naema Naeem, Librarian for making research material available and the NMC management
for the provision of support services as typing and printing.

i
 Executive Summary

Countries, irrespective of their degree of economic development, have frequently turned to tax
amnesties targeting three main sources - the underground economy, flight of capital and the
inadvertently underpaid taxes. Both within Pakistan and around the world tax amnesties have
been used as a policy tool to achieve these objectives. International experience of tax amnesties
shows that the possibility of an amnesty scheme achieving all three important goals of raising
revenue, improving future compliance and broadening of tax base is extremely unlikely.
Amnesties in some cases can be source of improvement in future tax but this happens rarely
and in countries where tax amnesty is a rare event. However amnesties can be an effective tool
of raising revenue in short run. International experiences also show that amnesties when offered
too frequently would be counterproductive and set in the law of diminishing returns.

The fact that Pakistan has either no tax culture or a very weak culture is reflected by the narrow
tax base, large informal economy and a huge tax gap. Failure in collecting optimum taxes has
resulted in repeated introduction of tax amnesty schemes in Pakistan but none of the schemes
had any noticeable impact on revenue collection, broadening of tax base or tax compliance.
Pakistan’s experiences also show that frequent stand-alone amnesties lead to diminishing
revenue yield with each successive scheme and they also have a negative impact on tax
compliance.

The lesson learnt from international as well as Pakistan’s experiences is that using tax
amnesties as a tool of regular tax collection without strengthening tax administration creates
adverse consequences for tax compliance in future. Studies conducted on this subject suggest
that amnesty schemes are effective in raising tax compliance when they are combined with
structural reform measures relating to tax policy and tax administration. Against this the
chances of a stand-alone amnesty scheme being successful in raising tax compliance are
virtually non-existent. This has been demonstrated time and again in Pakistan where repeated
amnesties appear to have resulted into declining tax compliance and a relatively un-dynamic
revenue performance. Therefore core policy and administrative weaknesses need to be
identified which lead to frequent tax amnesties. There should be a policy shift towards removal
of grounds that justify introduction of tax amnesties. Tax administration’s capacity building to
control tax evasion and bridge tax gap should be given precedence over resort to easy fixes like
tax amnesties.

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 Contents
INTRODUCTION................................................................................................................................. 1
SECTION – I ......................................................................................................................................... 5
TAX CULTURE AND TAX COMPLIANCE .................................................................................... 5
1.1 Tax Culture.................................................................................................................................... 5
1.2 Impact of cultural variation on tax compliance............................................................................... 5
1.3 Tax Compliance Strategies ............................................................................................................. 6
SECTION – II ....................................................................................................................................... 8
TAX AMNESTIES................................................................................................................................ 8
2.1 Scope and Characteristics of Tax Amnesties ............................................................................. 8
2.2 Tax Amnesties – Their Role in Tax Compliance ....................................................................... 8
2.3 Advantages ................................................................................................................................. 9
2.3.1 Generation of Additional Revenue ............................................................................................ 9
2.3.2 Encourage Future Compliance ................................................................................................... 9
2.3.3 Signal Changes in Rules or Enforcement................................................................................. 10
2.4 Disadvantages .......................................................................................................................... 10
2.4.2 Diminish Perceived Seriousness of Tax Evasion ..................................................................... 11
2.4.3 Create Expectations of Repetition............................................................................................ 11
2.5 Impact of Cultural Variation in Shaping Response to Tax Amnesties ................................... 12
SECTION – III .................................................................................................................................... 13
3.1 Tax amnesties around the world............................................................................................ 13
3.1.2 India ......................................................................................................................................... 13
3.1.3 Turkey ...................................................................................................................................... 14
3.1.4 The Philippines ........................................................................................................................ 15
3.1.5 Lessons from International Experiences ................................................................................... 16
SECTION – IV .................................................................................................................................... 17
EXPERIENCE OF TAX AMNESTIES IN PAKISTAN ................................................................. 17
4.1 Informal Sector and Tax Evasion in Pakistan ............................................................................. 17
4.2 Tax Gap in Pakistan .................................................................................................................... 18
4.3 Does Pakistan have a Tax culture? ............................................................................................. 19
4.4 Tax Amnesties in Pakistan .......................................................................................................... 19
4.4.1 First Amnesty Scheme 1958 ...................................................................................................... 20
4.4.2 Second Amnesty Scheme 1969 .................................................................................................. 20
4.4.3 Amnesty Scheme through Finance Act, 1976 ............................................................................ 20
4.4.4 Tax Amnesty Scheme 1997 ....................................................................................................... 21
4.4.5 Tax Amnesty Scheme 2000 (TAS 2000) ................................................................................... 21
4.4.6 Investment Tax Scheme, 2008 ................................................................................................... 22
4.4.7 Package of Amnesties through SRO 1065(1)/2013 ................................................................... 22
4.4.8 Impact of Tax Amnesties in Pakistan ........................................................................................ 23
CONCLUSION ................................................................................................................................... 25
RECOMMENDATIONS .................................................................................................................... 26
BIBLIOGRAPHY ............................................................................................................................... 27

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 INTRODUCTION
Tax amnesties are generally viewed by the policy makers as convenient policy tool to raise
revenues in short run which can be significant in some cases. The additional revenue becomes
most desirable in times of financial crisis when revenues are unable to meet the rising
expenditures. 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 amnesties
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
are achieved these 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. They also take cost benefit ratio of tax evasion in favour of tax
evasion. The sense of inevitability for a future tax amnesty which motivates noncompliance
often turn out to be correct as governments resort to new tax amnesties.

In spite of the temptations of tax amnesties for immediate additional revenues alternate policies
and strategies 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.

Statement of the Problem

Notwithstanding the reasons and factors warranting tax amnesties in any tax regime, inherently
such schemes always constitute the major distortions. Quantitative and qualitative impact of
such schemes on development of tax culture with special reference to Pakistan is worth looking
into.

1
Hypothesis

Repeated tax amnesty schemes negatively influence tax culture.

Significance and Scope of the Study

Tax amnesties remain a recurring feature of taxation policies in most of the countries. In spite
of their often criticized negative aspects the tax amnesties keep appearing every now and then.
This paper seeks to examine both negative and positive sides of tax amnesties and the impact
they have on tax culture and tax compliance with particular reference to Pakistan. For the sake
of in-depth analysis only major tax amnesties in direct taxes are being focused in this study.

Review of the Literature

There is substantial amount of research on the impact of tax amnesties and their impact on tax
compliance. Also relevant to this paper is previous work examining the relationship between
tax culture and tax compliance. 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

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 (Accessed on October 16, 2013)
3
Herman B Leonard & Richard J. Zeckhauser, ‘Amnesty, Enforcement and Tax Policy’ (Nat’l Bureau of Econ.
Research, Working Paper No. 2096, 1986
2
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) term tax amnesties ‘a penny wise pound foolish’ policy
that potentially impedes a state’s future progress as amnesties do not collect tax revenues in
the short run and in the long run they have unintended consequences of 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 were offered. However no study
appears to have been conducted to assess the impact such schemes. Thus there is a research
gap in this field as far as Pakistan is concerned.

Data Source and Method

The aim of the paper is to give findings on the worthiness of repeated tax amnesties in achieving
tax compliance so that results of this study may be of some help to understand whether
amnesties help in securing tax collection and broadening of tax base. The scope of this review
shall be examining the design of tax amnesties launched in Pakistan under various regimes.

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 Fatih 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 (Accessed Nov 13, 2103)

3
Thus, the methodology shall be restricted to the theoretical and qualitative analysis of the legal
documents in this regard.

Although this study uses data of revenue collections to assess the impact of tax amnesties in
tax compliance, it suffers from limitation that the findings are not fully supported by extensive
empirical analysis. This study has also not been able to gather and evaluate responses from the
taxpayers through qualitative surveys due to resource constraints in terms of time and funding.

Organization of the Paper

Sections 1 of this paper gives an overview of tax culture, impact of cultural variations in tax
compliance and formulation of tax compliance strategies. Section 2 contains tax amnesties
literature in detail. The review critically focuses theoretical aspects, merits and demerits of tax
amnesties. Section 3 analyses tax amnesties introduced in various jurisdictions across the globe
and the lessons from these experiences. Section 4 specifically focuses on Pakistan with
particular reference to informal economy and tax evasion. It critically evaluates various tax
amnesties introduced in Pakistan and their impact. The conclusion contains the findings of the
paper and sets out recommendations for future use by tax administrations.

4
 SECTION – I

TAX CULTURE AND TAX COMPLIANCE

1.1 Tax Culture

The concept of ‘tax culture’ is complex and the term to some extent remains ambiguous. It has
been defined in various ways involving elements of sociology, history and economics. Some
economists do not recognize ‘tax culture’ as an economic term and dismiss it as an emotive
expression. In taxation literature the term is often used to indicate an established tax system
and is therefore attached with progressiveness and modernity of a tax system. It is also used
interchangeably with the terms ‘tax morale’ and ‘tax discipline’. Thus a synthesis of various
definitions of the term tax culture indicates a consciousness or awareness on the part of
taxpayers of their obligation to pay taxes voluntarily. The measure of tax culture in a society
therefore is the level of tax compliance as it is a well-recognized fact that a state cannot collect
taxes beyond citizens’ willingness to pay. Nerré (2008) argues that the tax culture more
specifically is the tax mentality which consists of tax moral and tax discipline and solely aims
at the relationship of the taxpayer to the tax state. In general tax moral is a term connected with
“willingness-to-pay taxes” or a feeling of obligation to the general public or community or
state. Tax discipline then reflects the attitudes of the taxpayer in his or her actions.8

1.2 Impact of cultural variation on tax compliance

A national tax culture which appears synonymous with tax morale is collective state of mind
reflecting tax practices and behaviours resulting into establishment of relationship between tax
state and taxpayers. Some theoretical models show that tax morale has been the intrinsic
motivation to pay taxes. Tax morale evolves from the perception of individuals about the social,
political and economic system. When taxes are perceived as unfair and few tangible benefits
are received in return for taxes paid, then taxes cannot be collected voluntarily as a moral duty.
Thus, the difference in tax morale among countries has significant impact on the level of
compliance. Schneider and Torgler by their economic model confirm that a decrease of tax
morale by 1 unit would lead to an increase in the informal economy by approximately 20
percent points.9 An experimental study utilizing surveys also found that tax morale has positive

8
Birger Nerré, ‘Tax Culture as 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 (accessed on 16.10.2013)
9
Friedrich Schneider and Benno Torgler, ‘The Impact of Tax Morale and Institutional Quality on the Shadow
Economy’ Working Paper No. 0702, Department of Economics, Johannes Kepler University of Linz, Austria,
January 2007.
5
influence on compliances.10 Those who do not comply either completely operate in the
informal sector or conceal some of their activities.

Tax morale is a conviction to contribute to society by paying taxes. Therefore, Schneider and
Torgler term operating in the informal sector as an ‘attitude’ of a citizen towards tax
obligations.11 They believe that the ‘attitude’ problem casts wider implications in the form of
large informal economies as compared to the ‘behavioural’ issue (which is a driving force in
tax evasion). In the given context, Memon argues that the behaviour is related to individual
actions and ‘attitude’ is linked to individual feelings and opinions.12 More simply, an attitude
is more deep rooted and persistent problem when compared to behaviour.

However, it is noted that the tax morale does change in response to changes in governments’
performance or changes in tax rates and tax burdens. More simply, as argued by Bird, the tax
base (i.e. the total national income which is subjected to tax), which reflects the aggregate
compliance level in a country, can be increased or decreased through the manner in which the
taxes are collected.13 Thus, to improve tax compliance, governments have to improve the
delivery of their services including the operation of the tax system.

The above review of tax morale indicates that the compliance level depends on the quality of
governance. The compliance can be improved by improving the governance and perception of
fairness of tax system. Perhaps, no other measure can increase the compliance if the state
institutions continue to display unfairness and ineffectiveness in enforcement.

1.3 Tax Compliance Strategies

Tax compliance is the most intricate subject in taxation. Several strategies have been developed
by academicians, tax administrations and tax policy makers to achieve maximum compliance.
Tax compliance management is currently based on voluntary compliance by taxpayers through

10
Ronald G. Cummings, Jorge Martinez-Vazquez, Michael McKee and Benno Torgler, ‘Tax Morale Affects
Tax Compliance: Evidence From Surveys and an Artefactual Field Experiment’ (2009) 70 Journal of
Economic Behaviour and Organization 447, 457.
11
See Schneider and Torgler, Supra Note 9.
12
Memon Najeeb, ‘Is Income Tax Responsible for Large Informal Economies’ (2010) Asia Pacific Journal of
Taxation.
13
Richard M. Bird, ‘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
Self-Assessment Scheme (SAS). Some taxpayers are picked for audit to deter non-compliance
under SAS.

As already discussed, the role of tax morale has a significant impact on the tax compliance.
One point increase in the tax morale increases the tax compliance for same level in a direct
proportion. More simply, higher the level of tax morale, more the taxpayers to voluntary
comply. Therefore, tax morale is vital for success of SAS and overall compliance management
strategy. Government role in areas of tax administration and tax policy directly influences the
tax morale and inter alia tax culture in a country. Whether introduction of tax amnesties for tax
evaders can have impact on the morale of good or compliant taxpayers seems to be linked to
the prevailing tax morale and quality of service delivery by the state institutions.

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 SECTION – II

TAX AMNESTIES

2.1 Scope and Characteristics of Tax Amnesties

While tax amnesties differ widely in their design and character they share many common
features. A traditional amnesty is offered to all persons – those who have never filed returns
and also those who file their returns but have not accurately disclosed their income or assets.
Amnesties are sometimes designed to target a group of taxpayers in a particular sector of
economy where tax evasion is rampant. Amnesties may also be exclusively addressed to non-
registered taxpayers in order to include them in tax net but such exclusive amnesties are rare.
More often amnesties are addressed to all persons including the registered taxpayers to allow
them a chance of paying undeclared or under declared tax liabilities.

Amnesties widely differ in their characteristics. Some amnesties are designed to offer greater
incentives while others offer restricted benefits. Generally speaking tax amnesties offer one or
a combination of the following broad incentives:

a) Outright waiver for criminal prosecution.

b) Waiver of penalties.
c) Partial or total reduction in the amount of interest or default surcharge.
d) Partial reduction in the principal amount of taxes evaded.
e) Immunity from audit for a specific period.
f) Payment of taxes evaded in installments.

2.2 Tax Amnesties – Their Role in Tax Compliance

Governments across the world frequently resort to tax amnesties with a view to afford tax
evaders an opportunity to pay the taxes they owe. Both within Pakistan and around the world
tax amnesties have been used as a policy tool to generate additional revenue and bring tax
evaders into the tax net. Although amnesties have varying features but all amnesties seek to
invite tax evaders and delinquent taxpayers to the mainstream taxation with the incentives of
waiver of monetary and criminal penalties and prosecution. With the increased use of tax
amnesties as a policy tool there has also been increased interest of researchers to analyze the
utility of amnesties as source of tax compliance as well as their long term impact on taxpayer
behaviour. Potential benefits of amnesties and their disadvantages have also been extensively

8
debated. This section of the paper evaluates the utility of tax amnesties by examining the
benefits and disadvantages that may be expected from implementation of an amnesty scheme.

2.3 Advantages

Tax amnesties may give rise to following benefits which are reason for their use in most
jurisdictions.

2.3.1 Generation of Additional Revenue

The primary objective behind launching of tax amnesties is generally raising additional
revenue. The revenue enhancing effect of tax amnesties has been proved in many cases
although the quantum varies from case to case. Tax administrations generally expect a tax
amnesty to yield a substantial windfall from the immediate collection of the past uncollected
taxes from tax evaders.14 In a few cases the revenue generated by tax amnesties actually
surpassed the expectations. For instance, Ireland anticipated raising approximately $50 million
from a 1988 tax amnesty that gave delinquent taxpayers ten months to pay back taxes free of
penalties, interest and prosecution.15 Ireland however reported actual yields of $750 million at
conclusion of the amnesty.

Second, governments may use tax amnesties to raise revenue by encouraging the bringing back
of capital that is being held offshore illegally. This may lead to the generation of tax receipts
by fresh investment in the economy and payment of various taxes. For example, France’s 1986
amnesty and Italian ‘the Scudo Fiscale’ amnesty of 2001 specifically targeted repatriation of
capital which was previously taken out of these countries.16

2.3.2 Encourage Future Compliance

Another benefit frequently associated with tax amnesties is that they may encourage those who
are not currently compliant with the tax laws to become compliant in the future. Behavioural
economists argue that an individual will weigh the costs of compliance with the costs of
violating it.17 If the costs of violating the law exceed the costs of compliance, the individual

14
James Andreoni et al., Tax Compliance, 36 J. ECON. LITERATURE 818, 853 (1998) (noting the popularity of
tax amnesties during the 1980s as a revenue booster for state governments)
15
Elliott Uchitelle, ‘The Effectiveness of Tax Amnesty Programs in Selected Countries’, Federal Reserve Bank
of New York Quarterly Review, (1989).
16
Ibid
17
Report on ‘Tax Amnesty’ Prepared by the Staff of the Joint Committee on Taxation, US Congress, Washington
DC. (Comm. Print 2008) Available at http://www.gpo.gov/fdsys/pkg/CPRT-105JPRT46030/pdf/CPRT-
105JPRT46030.pdf (Accessed on Oct 14, 2011)

9
will comply with the law. In an amnesty, the government waives penalty that fosters continued
noncompliance and in exchange, adds a previously noncompliant taxpayer to the tax rolls who
is expected to generate a future stream of tax revenue.

2.3.3 Signal Changes in Rules or Enforcement

A significant benefit of amnesties in general is that they may ease the transition to a new legal
regime or signal an impending change in enforcement activities. For example, in 1961 the
Internal Revenue Service (IRS) in USA installed new data processing equipment that was likely
to have made it more difficult to evade taxes.18 The IRS issued a news release at the time
suggesting to taxpayers that it might be prudent to voluntarily disclose any underpayments of
tax. The news release, although stopping short of offering amnesty, stated that the chances of
criminal prosecution following such a voluntary disclosure would be low.19

2.4 Disadvantages

Although a tax amnesty may generate significant revenue in the short term, the measure of a
tax amnesty’s effectiveness is the extent to which it shifts collections upward over the long-
term, not the amount it yields on a one-time basis.20 Tax amnesties frequently have been
criticized as likely to actually reduce tax compliance for a variety of reasons. Obviously, an
amnesty is of little use if the cost of the additional short-term revenue is an overall reduction
in tax compliance.21 The following are some of the ways in which tax amnesties may be
potentially detrimental to tax compliance.

2.4.1 Undermine Perceived Fairness of the Tax System

Tax amnesties are frequently criticized on the ground that they create perception among
taxpayers that the tax system is unfair. The economic literature on the effect of taxpayer
attitudes indicates that taxpayers are more likely to voluntarily comply with tax laws when they
believe that the tax system is fair and that other taxpayers are complying.22 Tax amnesties may
be viewed as unfair because they offer the tax evader a benefit that is withheld from the person

18
Ibid
19
Ibid
20
Leonard & Zeckhauser, supra note 3.
21
Leo P. Martinez, Federal Tax Amnesty: Crime and Punishment Revisited, 10 VA. TAX REV.
535, 555 (1991)
22
Steven M. Sheffrin & Robert K. Triest, Can Brute Deterrence Backfire? Perceptions and Attitudes in Taxpayer
Compliance, in WHY PEOPLE PAY TAXES: TAX COMPLIANCE AND ENFORCEMENT 193, 214 (Joel
Slemrod ed., 1992)
10
who has complied with the tax law and paid his or her taxes. This is particularly true where the
government waives interest owed on delinquent taxes, as well as penalties. In such cases, the
tax evader has benefited from his evasion to the extent of the interest he earned or could have
earned on the unpaid taxes during the term of his delinquency. By contrast, the compliant
taxpayer has already forfeited the interest he/she could have earned on taxes that were paid
when due.

2.4.2 Diminish Perceived Seriousness of Tax Evasion

Another concern about tax amnesties is that when an amnesty is offered, some may see
government as signaling to society that it does not take seriously the honest reporting and
payment of tax liabilities.23 This, in turn, may lead to more tax cheating, as those who
previously were compliant may feel justified in making less than full compliance.

A related concern is also that enacting a tax amnesty may signal to taxpayers that the
government is unable to enforce tax compliance. As a result, a taxpayer may conclude that the
probability of his or her tax evasion being detected is sufficiently low to make attempting to
cheat worthwhile.

2.4.3 Create Expectations of Repetition

The implementation of a tax amnesty may give rise to expectation that a government will offer
more amnesties in the future.24 Given the experience with tax amnesties in most of the
countries, the expectation is warranted. Italy has offered more than a dozen tax amnesties.25
Ireland offered five amnesties in a six-year period and Argentina has offered six amnesties over
a forty-year period. Of the 41 states in USA that have offered tax amnesties since 1982, 31
have offered at least one subsequent tax amnesty.26

Economists have noted that the expectation of future amnesties may create an entirely
unintended incentive structure.27 A tax evader may decide to forego participation in the first
amnesty offered if he or she believes that another amnesty will be available in the foreseeable
future.28 Worse, a compliant taxpayer may also be encouraged to begin evading taxes if he or
she believes that another amnesty will be offered and that his/her tax evasion will be

23
Ibid
24
See supra Note 17
25
Ibid
26
Ibid
27
See Alm et al.,supra note 5
28
See supra Note 17
11
legitimized. Thus, multiplicity of amnesties generally is associated with an overall reduction
in tax compliance. Italy’s multiple amnesties have been blamed for its low overall level of tax
compliance.29

2.5 Impact of Cultural Variation in Shaping Response to Tax Amnesties

Although there is no empirical evidence is in the knowledge of the author that cultural
variations have impact in shaping the response to tax amnesties, it can be argued that the
cultural distinctions which influence the overall compliance to tax laws may also influence the
response to tax amnesty programme in a jurisdiction. More simply, as stated earlier, in case the
government institutions are considered as weak and likelihood of successful enforcement is
poor in a jurisdiction, then, the probability of availing tax amnesty might be low. That also
explains why the governments which have repeatedly used amnesties to mop in revenue have
failed to meet the revenue targets envisaged in those amnesties as every subsequent amnesty
has generated less revenue as contrast to the preceding one.

29
Ibid
12
 SECTION – III
INTERNATIONAL EXPERIENCE OF TAX AMNESTIES

3.1 Tax amnesties around the world

Black money has always been at the global center stage. It is a serious threat which has huge
impact on a country’s revenues. Governments worldwide have tried to fight the problem with
stringent laws but they often find it difficult to control the tax evasion by enforcement alone.
Therefore countries, irrespective of their degree of economic development, have frequently
turned to tax amnesties targeting three main sources - the underground economy, flight of
capital and the inadvertently underpaid taxes. These countries include developed as well as
the developing countries and many of these have a series of amnesties. Developed countries
such as Italy (1982, 1984, 2002), Austria (1982, New Zealand (1988), Portugal (1981, 1982,
1986, 1988), France (1982, 1986), Australia (1993), Belgium (1984), Finland (1982, 1984),
Greece, Ireland (1988, 1993), Spain (1977) and Switzerland have all introduced amnesties at
some point.30 Developing and transition countries that have also resorted to amnesty
programmes include Panama (1974), Peru, Mexico, Philippines, the Russian Federation (1993,
1996, 1997), Argentina (1987, 1995), Bolivia, Chile, Columbia (1987), Ecuador, India,
Pakistan (several years), and Turkey. In the United States 42 states have offered 78 amnesties
programmes since 1982. The results of tax amnesties at international level is rather mixed.
Success of tax amnesties, when measured in terms of the gross amount of revenue raised, makes
three cases stand out prominently. These are Argentine general tax amnesty of 1995 which
yielded gross revenue of around $3.9 billion followed by ‘Voluntary Disclosure
of Income Scheme’ in India in 1997 ($2.5 billion) and the Irish amnesty of 1988 ($750 million).

3.1.2 India
Indian government has offered different tax amnesties since independence. The first scheme
was offered in 1951 and the second one was offered twice during 1965. Following that two
other schemes were offered in 1975 and 1985. On June 18, 1997 the Central Board of Direct
Taxes of India launched Voluntary Disclosure of Income Scheme (VDIS). Despite failure in
previous amnesty programmes this scheme was considered a success. The scheme was unique
in the sense that no considerable fiscal incentive was offered to tax evaders as they were
required to pay taxes at the prevailing rates. The voluntary disclosed income was to be charged

30
Alm, James ‘Tax Policy Analysis: The Introduction of a Russian Tax Amnesty’ 3 (Georgia State University,
Int’l Studies Program, Working Paper No. 98-6, 1998)

13
at the rate of 35% in case of companies and at the rate of 30% in other cases. Although the
scheme provided immunity against prosecution under the Income Tax Act 1961, Wealth Tax
Act 1957, Foreign Exchange Act 1973 and the Companies 1956, yet no immunity was available
from prosecution for economic offenses. Under the scheme any person could file a declaration
of undisclosed income relating to any assessment year prior to 1998-99.

Success of VDIS exceeded the expectations of the policy makers. The scheme attracted a total
of 475,477 declarants of whom 77,107 were new taxpayers. The total amount declared was
Rs.33,697 crores (US $ 8.58 billion) on which Rs.8,729 crore (US $2.5 billion) was paid as
tax.31 This amounted to one-fifth of what the Government had collected in direct taxes in the
preceding financial year. However VDIS was also criticized for granting immunity against any
penal action or prosecution under four different laws. The scheme was however termed as
abusive and a fraud on the genuine taxpayers by the Comptroller and Auditor General of India
in his report.

3.1.3 Turkey

Governments in Turkey have repeatedly relied on tax amnesties to reduce arrears. However the
persistence of arrears reflect a history of failed tax amnesties, poor collection practices, weak
enforcement and lack of capacity of tax administration. The cycle of amnesties and weak
collections is self-perpetuating. More recently Turkey has introduced three major amnesty
programmes. Tax Peace Plan amnesty was introduced in early 2003 which offered the
taxpayers to clear their overdue arrears over a period of 18 months with reduced interest rates.
Of the 38,000 taxpayers who initially participated in this programme, nearly 1/3 rd later
defaulted. This was followed by Social Contributions Amnesty in August 2003 with a view to
restructure the stock of social contribution arrears. The scheme’s main benefit was to introduce
a sixty month repayment period.32 In 2005 yet another amnesty was introduced which provided
for a number of blanket tax exemptions and amnesties. To stem the decline in revenue and
encourage tax compliance from taxpayers who wanted, but were unable, to comply with their
tax liabilities, the government introduced a programme which provided for different defaulters
based on their ability to pay.

31
Phyllis, Lai Lan Mo ‘Tax Avoidance and Anti-Avoidance Measures in Major developing Economies’ (Westport
CT : Praeger Publishers, 2003)

Katherine Baer and Eric Le Borgne ‘Tax Amnesties – Theory, Trends and Some Alternatives’, International
32

Monetary Fund, Washington DC, 2008

14
These amnesties raised little revenue and on the contrary they may have helped cultivate a
culture of non-compliance. Turkey’s repeated tax amnesty programmes do not appear to have
been successful either in raising net long term revenue or in increasing compliance. These
programmes have been introduced independently of major tax policy changes or of
fundamental improvements in the capacity of the tax administration to enforce collection of tax
liabilities and contributions.

3.1.4 The Philippines

About 18 amnesty programmes were introduced between 1972 and 1987; these amnesties
concerned most taxes, including taxes on income, motor vehicles, goods and property. In some
amnesties, taxpayers with disputed assessments were also eligible. In addition to these tax
amnesties all penalties and surcharges were waived as an incentive to the taxpayers. The first
tax amnesty was offered in October 1972 and any taxpayer who took the amnesty was granted
a waiver of unpaid income tax and penalties related to the non-compliance. Civil and criminal
liabilities imposed under the relevant laws, including the Anti-Graft and Corruption Act, were
also waived. This scheme was followed by another scheme in November 1972 which offered
amnesty to owners of untaxed motor vehicles and other goods brought into the country without
paying import duties in exchange for 25% to 50% of the taxes due. Subsequently amnesties
were offered in 1973, 1974, 1975, 1986, 1999 and 2002 which had broader coverage.33 In
addition to undeclared income and wealth taxes these amnesties also covered inheritance and
gift taxes.

The Philippines revenue administration suffers from severe weaknesses, some of which made
launching of tax amnesties a risky undertaking. During the entire period between 1970 to 2002
the amnesties were implemented in an environment characterized by a weak revenue
administration and culture of low tax compliance. A study carried out by tax authorities in
Philippines in 2003 revealed that the track record of past amnesty programmes was poor. The
study showed that tax amnesty programmes between 1972 and 1987 yielded revenue which
translated into an average collection rate of 1.6% of annual tax revenue. Moreover the declining
trend in tax revenue collection in the 1999-2005 period suggested that non-compliance rate had
increased during this period.34

33
Ibid
34
Ibid
15
3.1.5 Lessons from International Experiences
International experiences of tax amnesties show that the possibility of an amnesty scheme
achieving all three important goals of raising revenue, improving future compliance and
broadening of tax base is extremely unlikely. However amnesties can be an effective tool of
raising revenue in short run as in case of Irish tax amnesty of 1988, Indian amnesty of 1997
and Argentinian amnesty of 1995. Amnesties in some cases can also be source of improvement
in future tax compliance as in case of Irish amnesty of 1988 but this happens rarely and in
countries where tax amnesty is a rare event. Subsequent amnesties even in Ireland were neither
helpful in raising revenue nor in improving tax collection. Amnesties can be a source of
broadening of tax base as in case of Ireland and India but the scale of broadening is extremely
limited. However key to achieving improved tax collection, tax compliance and broadening of
tax base is the improved enforcement capacity of the tax machinery. Amnesties when not
combined with improvement of the revenue administration are not likely to achieve their
objectives as was the fate of Italian amnesty ‘the Scudo Fiscale’ of 2001 aimed at repatriating
offshore investments. International experiences also show that amnesties when offered too
frequently would be counterproductive. Repeated amnesties generally set in the law of
diminishing returns as the taxpayers tend to forgo tax compliance while speculating the next
amnesty. Argentina, Philippines and Turkey have frequently resorted to tax amnesties and there
are indications that repeated recourse to amnesties appear to have cultivated a culture of non-
compliance in these countries.

16
 SECTION – IV
EXPERIENCE OF TAX AMNESTIES IN PAKISTAN

4.1 Informal Sector and Tax Evasion in Pakistan

A large share of Pakistan’s GDP comes from the informal economy which remains
undocumented and therefore out of the tax net. The result therefore is a strong parallel economy
alternatively called as black or shadow economy. It consists of gains generated both by legal
and illegal activities. It includes hugely profitable activities of criminal nature such as
smuggling of contraband goods including narcotics, arms and ammunition as well as
manufacturing of counterfeit goods including cosmetics, auto parts, medicines and computer
software etc. Another major contribution to black economy comes from corruption in the
government at all levels especially in developing countries like Pakistan. Black economy
however does not entirely consist of activities of illegal nature. Otherwise perfectly legal
market-based production of goods and services become part of black economy when they are
deliberately concealed from tax and other relevant authorities to avoid payment of taxes, social
security contributions, and meeting other requirements such as minimum wages, maximum
working hours and safety standards etc.

The black economy is not only detrimental to revenue collection but also seriously undermines
equity among taxpayers as the informal sector escapes untaxed while the formal sector carries
the whole tax burden. There is no unanimity among the economists about the size of Pakistan’s
informal economy. A very close estimate of informal economy in Pakistan is difficult because
of data constraints. Pakistan has no quantitative data regarding the contribution of the informal
sector to GDP except employment data. The data shows that the share of the informal sector in
employment in the non-agricultural sector increased from 65% in 2002 to 73% in 2006.35 M.
Ali Kemal (2007) has estimated the size of the underground economy and tax evasion in
Pakistan and explored the impact of the underground economy on formal GDP. Using the
NTRC (1986) estimates of the underground economy and tax evasion for the year 1984-85,
Kemal estimates size of the underground economy between Rs 2.91 trillion—Rs 3.34 trillion
(54.6 percent of GDP to 62.8 percent of GDP respectively) and tax evasion between Rs 302
billion—Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005.36 In

35
ADB, ‘Private Sector Assessment of Pakistan’ Asian Development Bank, December 2008, Available at
http://www.adb.org/documents/private-sector-assessment-pakistan
36
M. Ali Kemal, ‘A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes,
Consequences, and Linkages with the Formal Economy’ PIDE Working Papers 2007:13 Pakistan Institute
of Development Economics, Islamabad (2007)
17
a 2012 report by Pakistan Institute of Development Economics (PIDE) M. Ali Kemal and
Ahmed Waqar Qasim using a more robust approach than previous studies, suggest that the size
of the informal economy in 2008 was 91.4 per cent of the formal economy.37

4.2 Tax Gap in Pakistan

Tax evasion in a country inevitably leads to tax gap and its size is directly proportional to the
scale of tax evasion. “Tax gap is the difference between the full potential tax revenues that is
legally due to the state and the actual tax revenues collected. The key variables that determine
the size of tax gap in a country include the structure of the economy, the rule of law and tax
morality. Although tax gap is often associated with tax evasion and avoidance, a broader
measure of tax gap is simply non-compliance.”38 As a general trend, the level of tax gap
depends on the level of development of countries. Developed countries generally report low
level of tax gap. For example among the developed nations New Zealand and USA report
average tax gap of 9%, Sweden 10%, UK 13% and Australia 14%. Developing nations on the
other hand such as South Africa, Bangladesh and Thailand have average tax gaps of around
23%, 36%, and 53% respectively. As regards Pakistan there are a number of estimates of tax
gap some of which put the gap beyond 100%. The low tax to GDP ratio in Pakistan hovering
around 9% is generally taken as a measure of tax gap. Robina Athar Ahmed and Mark Rider
(2008) using micro-simulation model have estimated federal tax gap for the fiscal year 2004-
05 to be about 409.5 billion or approximately 69% of actual receipts of 590.4 billion.39
Subsequently the World Bank report in 2009 put tax gap in Pakistan at 79% based on the figures
for the year 2007-08 which amounted to Rs.796 billion.40 The size of tax gap at this rate for the
year 2012-13 would work out at Rs.1532 billion against FBR’s net collection of Rs.1939
billion. As in case of informal economy, the tax gap over the years also indicates a rising trend.

37
M. Ali Kemal, and Ahmed Waqar Qasim ‘Precise Estimates of the Informal Economy’. The paper was
presented at the 28th AGM and Conference of the PSDE. Available at
http://www.pide.org.pk/psde/25/pdf/AGM28/M%20Ali%20Kemal%20and%20Ahmed%20Waqar%20Qasi
m.pdf

38
Phua, Stepen ‘Tax Gap : Causes and Solutions’ Indian Council for Research on International Economic
Relations, New Delhi 2011.

39
Robina Athar Ahmed 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.

40
‘Pakistan Tax Policy Report - Tapping Tax Bases for Development’ World Bank Report No. 50078-PK.
Available at http://aysps.gsu.edu/isp/images/pakpolicy1.pdf (Accessed on 03.01.2013)

18
4.3 Does Pakistan have a Tax culture?

The fact that Pakistan has either no tax culture or a very weak culture is reflected by the narrow
tax base, large informal economy and a low tax to GDP ratio. According to Birger Nerre a ‘tax
culture’ specific to a particular country is coined by the tradition of taxation on the one hand,
and by the interaction of the cultural values like ‘honesty’, ‘justice’ and ‘a sense of duty’ on
the other hand.41 Pakistan is a society where the values like respect for law and a sense of
obligation towards state are not very strong. Pakistan does not have a very strong taxation
traditions. On the contrary it has inherited a culture of tax defiance from the resistance to
oppressive taxation during colonial era. Thus unlike most of the developed nations tax culture
is not historically embedded within Pakistani culture. Although many countries, after strong
resistance to taxation during colonial rule, developed a strong tax culture in post-colonial
periods but a number of factors peculiar to Pakistan have not allowed tax culture to nurture.

One of the reasons for weak tax culture in Pakistan may be attributed to the role of religion in
Pakistani society. People generally place their religious obligations above their obligations to
the country and therefore payment of zakat takes precedence over any secular tax. However it
is not only the religion that hampers tax culture to foster. The absence of good governance and
perception of unfair taxation are probably more significant. While the powerful elite in whose
hands a major chunk of country’s wealth is concentrated flout tax laws with impunity and the
laws are designed to allow preferential benefits to certain powerful groups, rest of the society
sees little sense in contributing their share to the exchequer. Anatol Lieven has attributed this
state of affairs to weak state with strong societies. “A fundamental political fact about Pakistan
is that the state, whoever claims to lead it, is weak, and society in its various forms is immensely
strong. Anyone or any group with the slightest power in society uses it among other things to
plunder the state for patronage and favours, and to turn to their advantage the workings of the
law and the bureaucracy. Hence the astonishing fact that barely 1 per cent of the population
pays income tax, and the wealthiest landowners in the country pay no direct taxes at all.”42

4.4 Tax Amnesties in Pakistan

The failure in collecting optimum taxes resulted in repeated introduction of tax amnesty
schemes in Pakistan. A brief overview of those amnesties follows as under.

41
See supra Note 2
42
Lieven, Anatol ‘Pakistan A Hard Country’ Penguin Books, London (2011)
19
4.4.1 First Amnesty Scheme 1958
Pakistan’s first amnesty scheme was introduced in November 1958 under the Martial Law
Regulation 48 of 1958. Through this scheme opportunity was provided to all the taxpayers,
liable to pay tax under Income Tax Act 1922, to file revised returns of their income for any one
or more assessment year from 1954-55 to 1958-59 where the returns filed by them previously
were not correct. The regulation provided that the excess income i.e. income represented by
the difference between the revised return and the original return will be treated as a separate
unit of income. A tax rate of 35% subject to rebate of 2% for payment within 30 days of filing
of revised return was fixed for accepting the returns. Subject to correct declarations immunity
from penalty and prosecution was guaranteed.

A total of 86,000 declarations were filed. Out of this, 60,000 related to business and 20,000
related to salary cases. This total included 20,000 new cases. An excess income amounting to
Rs.1350 million was declared with tax liability at Rs.223 million.43

4.4.2 Second Amnesty Scheme 1969

In 1969, Martial Law Regulation No 32 was issued allowing the taxpayers to correct returns
and false declarations. The opportunity was given to new as well as existing taxpayers. Any
person who had filed the return of income under the Income Tax Act 1922 for the assessment
year 1960-61 or any subsequent year could file the revised return. Separate or consolidated
returns for multiple years for such excess income were allowed. New taxpayers were also
allowed to file the consolidated return for their true income. The declarants were not required
to disclose the source of income and they were promised immunity from all punitive actions.
A total number of 20,000 declarations were filed under this scheme showing excess income of
972 million on which tax liability of 357 million was paid.44

4.4.3 Amnesty Scheme through Finance Act, 1976

First amnesty by any democratic government was introduced through Finance Act 1976 by
amendment in Income Tax Act 1922 to tax undisclosed income up to years 1975-76 at the rate
of 30%. The disclosure was allowed to be either made separately for each year or
consolidatedly for all years. The taxpayers were required to identify the assets in which
undisclosed income had been invested. Immunity was given to the declarants from all punitive

43
ADB, ‘Private Sector Assessment of Pakistan’ Asian Development Bank, December 2008, Available at
http://www.adb.org/documents/private-sector-assessment-pakistan (Accessed on Dec. 04, 2013).
44
FBR data
20
actions under Income Tax, Sales Tax, Wealth Tax and Central Excise Acts. However, non-
filing of declarations or misdeclarations entailed imprisonment of upto 5 years and penalty
equal to the amount of tax which was sought to be evaded.

Total amount of undisclosed income under the scheme was disclosed at Rs.1500 million on
which tax @30% amounting to Rs.450 million was paid.

4.4.4 Tax Amnesty Scheme 1997

Tax Amnesty scheme 1997 was introduced by inserting a new section 3A in the Wealth Tax
Act 1963 by the Finance Act 1997. Under the scheme any person filing voluntary declaration
of undisclosed or under-disclosed assets, in respect assets possessed upto the assessment year
1997-98, was granted amnesty from additional tax, penalty, penal action or prosecution for any
non-disclosure, whether deliberate or not. The declared assets were to be taxed at the standard
rate of 2.5% of the net value. The scheme had been launched with the expectations of
generating a sizeable revenue but it proved to be a disappointment as it failed to evoke
noticeable response from the taxpayers and only a paltry amount of Rs.141 million could be
raised through this scheme.45

4.4.5 Tax Amnesty Scheme 2000 (TAS 2000)

Another tax amnesty was offered in March 2000 through CBR circular No.04 of 2000 whereby
all persons were allowed to declare undisclosed income and assets by paying tax rates at 10%
instead of normal tax rates of upto 35%. The declarants were exempted from all penalties and
prosecutions under the Income Tax Ordinance, 1979. Assets declared under the scheme were
also exempted from levy of wealth tax for all assessment years. Tax Amnesty Scheme 2000 is
considered to be the most successful amnesty scheme among amnesty schemes offered so far
in Pakistan in terms of taxpayer response and the revenue collection. A total of 88,000 persons
filed their declarations of undisclosed assets amounting to Rs.103 million. An amount of
Rs.10.5 million was yielded in revenue.46 The relatively good response to this scheme can be
attributed to survey of properties which was being simultaneously carried out in major cities
with assistance of army.

Encouraged by the amount of revenue raised through this scheme the FBR announced another
amnesty scheme named as ‘New Tax Amnesty Scheme’ through circular No.19 of 2000. It was
in fact an extension of earlier tax amnesty 2000 in its terms and conditions except that this
scheme allowed the taxpayers to pay 50% of tax with the declaration while the rest could be

45
FBR data
46
FBR data
21
paid in maximum of three equal monthly installments. This extended scheme failed to have
any impact on the revenue due to poor response from the taxpayers. As regards role of these
schemes in broadening of tax base no data appears to be available with FBR showing break up
of existing and new taxpayers who opted for this scheme. Nevertheless, it is obvious from the
tax to GDP ratio and number of registered taxpayers in the post amnesty period that the fate of
these schemes was not different from the earlier amnesty schemes. More simply, like other
amnesties in the past, these amnesties also failed to broaden the tax base or to secure higher
level of compliance from the taxpayers in the post amnesty period.

4.4.6 Investment Tax Scheme, 2008

A new section 120A was added to the Income Tax Ordinance 2001 through the Finance Act
2008 which empowered the FBR to offer a tax amnesty scheme in respect of undisclosed
income, representing any amount or investment made in movable or immovable assets. Using
the newly conferred powers the FBR announced the Scheme of “Investment Tax – 2008” on
1st July 2008 through Circular No. 03. This was most lucrative tax amnesty scheme in terms of
its cost to the taxpayers and therefore a good response was expected by the FBR. This scheme
offered the taxpayers an opportunity to legitimize their undisclosed assets at a nominal tax rate
of 2% of the fair market value. It was subsequently announced that the question as to what was
the fair market value of an undisclosed asset had been left to the taxpayers as the government
had reposed full trust in them. New tax payers availing this scheme were required to file return
of income for the tax year 2008 and subsequent three consecutive tax years even if they had no
taxable income. It was guaranteed that the department would not question the source of
acquisition of assets declared under the scheme. The scheme had been conceived with a view
to defeat the easily available avenue of money laundering. Currently persons engaged in illegal
Hawala and Hundi business illegally transfer money abroad on behalf of persons seeking to
whiten black money and bring back the same through banking channel as foreign remittances
usually within 48 hours at a nominal cost of 2% of the amount. It was therefore thought that if
the same cost of whitening is offered to taxpayers a large number of taxpayers would be willing
to avail the scheme. However it turned out to be a disappointment as only Rs.2.5 billion47 could
be collected under the scheme.

4.4.7 Package of Amnesties through SRO 1065(1)/2013

Through the Finance Act 2013 section 120A of the Income Tax Ordinance 2001 which
empowered FBR to offer tax amnesties was withdrawn. However FBR has now come up with

47
FBR data
22
a new tax amnesty scheme by way of SRO 1065(10/2013 dated: December 20, 2013 invoking
section 53 of the Income Tax Ordinance 2001. The said section empowers the FBR to exempt
from tax or reduce tax rate in case of a class of income or persons. Under the scheme no
question shall be asked regarding investment made in an industrial undertaking made before
1st January 2014 except in ten industrial sectors specified in the SRO. Similarly immunity from
penalty, additional tax and audit will be available to the individuals who have NTN if they file
returns of income for last five years and pay minimum tax of Rs.20,000/- per annum. In case
of business individuals not having NTN minimum tax payable would be Rs.25,000/- per
annum.48 Immunity from audit shall be available to all taxpayers availing this amnesty scheme
for the preceding five years as well as the next five years. The scheme is scheduled to close on
28th February 2014.

4.4.8 Impact of Tax Amnesties in Pakistan

Pakistan is among the countries which have repeatedly experimented with tax amnesties. Apart
from the major amnesty schemes mentioned above there have been a number of other small
amnesty schemes offered from time to time such as payments of arrears without additional
taxes and penalties and on the indirect taxes side legalization of smuggled vehicles. Amnesties
in Pakistan have been used as a convenient tool to enhance revenue in times of financial
constraints but amnesties have never helped improve revenue position significantly. An
analysis of last three amnesties in Pakistan shows that their contribution to direct taxes as well
as to overall tax collection had been negligible as shown in the following table:

Tax Amnesty Contribution to Revenue (Rs. in Billion)

Tax Revenue FBR Collection Ratio of Total FBR Ratio of

Amnesty from Under Direct Amnesty Collection Amnesty
Scheme Amnesty Taxes Contribution Contribution
1997 0.141 103.182 0.13% 293.60 0.048%

2000 10.50 112.950 9.29% 347.10 3%

2008 2.50 440.271 0.56% 1157.00 0.2%

Source: FBR

As shown above the revenue impact of amnesties in Pakistan has been overstated. There is also
no evidence to show that that tax amnesties had any impact on broadening of tax base or
improved tax compliance. One can hardly notice any extraordinary improvement in collection
trends and taxpayer population in the years immediately following the amnesties. Theoretically

48
SRO 1065(1)/2013 issued by FBR on Dec 20,2013.
23
tax amnesties reduce the amount of activity occurring in the underground economy as this
activity shifts into the mainstream economy leading to increases both in the tax base and future
tax revenues. However this assumption has not been proved correct at least in Pakistan’s case.

24
 CONCLUSION
The reason for offering tax amnesties is generally immediate revenue requirements during
periods of financial constraints. Amnesties also help repatriate offshore capital and promote
domestic investment. Theoretically tax amnesties may also improve tax compliance. While
short term improvement of revenues is achieved as a result of amnesties it is not easy to
measure effectiveness of an amnesty in improving tax compliance. A number of studies
conducted on this subject suggest that amnesty schemes are effective in raising tax compliance
when they are combined with structural reform measures relating to tax policy and tax
administration. Against this the chances of a stand-alone amnesty scheme being successful in
raising tax compliance are virtually non-existent. A stand-alone tax amnesty on its own is
unlikely to affect the cost-benefit ratio of tax evasion. In fact tax compliance level can only be
significantly raised by increasing the cost of tax evasion on the one hand and reducing its
benefits on the other. International experience of stand-alone tax amnesties show that in many
countries these schemes generated insignificant additional revenue both in absolute amounts
as well as percentage of overall revenue collection. Secondly, although some of the stand-alone
amnesties have attracted reasonable response from taxpayers but revenue impact has not been
significant because of low rates of tax offered.

International experiences also show that frequent tax amnesties lead to diminishing revenue
yield from each successive scheme and they also have a negative impact on tax compliance.
The lesson learnt from these experiences is that using tax amnesties as a tool of regular tax
collection without strengthening tax administration creates adverse consequences for tax
compliance in future. This has been demonstrated in time and again in Pakistan where repeated
amnesties appear to have resulted into declining tax compliance and a relatively un-dynamic
revenue performance.

It is important to understand the peculiar nature of Pakistani society that does not allow the
modern concept of tax culture to easily fit in. The relationship of citizens with the state based
on tax morale and tax discipline as visualized by Nerré is yet to be established in Pakistan. It is
therefore not surprising that the overwhelming portion of tax revenue in Pakistan comes
through enforcement rather than voluntary compliance. Nevertheless it must be realized that
tax culture evolves gradually and its growth, apart from level of education in the society, greatly
depends upon fairness of the tax system. The repeated tax amnesties in Pakistan which have a
serious effect of reducing the gravity of tax evasion have been negatively influencing the
growth tax culture and thus contributing towards lowering compliance levels. The hypothesis
is therefore proved.
25
 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 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.

26
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International Studies Programme Working Paper 08-11, Andrew Young School of Public Studies, Georgia State
University, Atlanta 2008.

Alm, James & William Beck, ‘Tax Amnesties and Compliance in the Long Run: A Time Series Analysis’, 46
National Tax Journal, (1993)

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