0.6% to 0.3%: Government’s incentive to violators.

An ordinance; a relief for protestors, a mockery of the legal system, a slap on the state’s face, a joke with tax-paying and law abiding citizens and a new low for a federal government.

In the last hours of July 11th, 2015 the President of Pakistan issued an ordinance, on advice of the Prime Minister, reducing withholding tax on banking transactions, for non-filers, from 0.6% to 0.3% till September. The rate had only recently been increased to 0.6% in the Finance Bill 2015/16 passed by the Parliament of Pakistan.

My jaw had dropped when I heard that the federal finance minister had succumbed to protesting traders and agreed to reduce said tax rate. It dropped a little further when I found out that the Prime Minister had advised the President to issue an Ordinance to that effect. It couldn’t drop any further, but would have if it could have, when my eyes saw the news of this ordinance being actually promulgated.

I am sure most of my readers are familiar with these terms, but for the few who are not, let me explain in short.

Withholding tax: is a tax deducted in advance collected by the state from its citizens. At year’s end such taxes can be adjusted against the tax owed and paid by a citizen, and if no tax is owed or an amount less than the withholding tax already deducted is owed, then the surplus amount is refundable to a citizen. Purpose of imposing withholding taxes is to ensure tax collection and revenue generation.

Filers and non Filers: Citizens who perform their legal duty of filing annual income tax returns in accordance with the Income Tax Ordinance of 2001 are considered as “filers”. Citizens who do not perform this duty are said to be “non-filers”.

Different rates of withholding tax for filers and non filers: It is a widely practiced measure to bring more and more citizens into the tax net. How it works is that the government raises rates of withholding taxes for non-filers on different transactions like sale and purchase of property, imports, banking transactions etc. in order to encourage these citizens to fulfil their legal obligation and file income tax returns.

So why did my jaw drop? what just happened?

The government of Pakistan, by way of a law passed in the Parliament of Pakistan less than a month ago, raised the rate of withholding tax for non-filers; citizens who are not performing their legal duty and are violating the law.

In reaction to this, a group of traders and businessmen protested. Obviously this group comprised of non-filers, since the 0.6 % rate was not applicable to filers.

As a result of this protest the Federal Government through its finance minister not only negotiated with citizens who weren’t just violating the law but openly admitting to said violation, but went further and agreed to their demands.

Doesn’t make sense? Let it sink in. It’s ok, let your jaw drop.

Apparently the protestors have agreed to file returns and come in the tax net by September this year, and that is a win-win for our finance minister. But if they can make the government render a very recently passed law ineffectual, wouldn’t they give protest another shot before abiding by the law?

What amazes me is how a small group of individuals who have been violating the law by not filing income tax returns, forced the government to its knees in days. Is anyone still wondering how “someone” swept power away from the government so easily?

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