InternationalVolume 13 Issue # 18

Another tax amnesty scheme

The government has announced a tax amnesty scheme aimed at broadening the government’s revenue base. The policy is meant to whiten undeclared assets at home and abroad, reduction in income tax rates for existing taxpayers and issuance of dollar-denominated bond.

The government has claimed that the scheme is different from all others because of its carrot-and-stick approach; it maintains that the amnesty is designed to “change the economic landscape” of Pakistan — more than to bring back a specified amount of revenue or foreign exchange into the country. It has quoted the example of Indonesia where an amnesty scheme that was announced in 2016 and ran till 2017 resulted in an amount of $330bn swelling the government coffers. All this sounds good on the surface, but facts tell a different story.

Indonesia has had four tax amnesty schemes in its seven decades as an independent country; for Pakistan, this is the sixth one in the past one decade. One argument is that under certain circumstances, tax amnesty schemes indeed work to advance the government’s revenue effort. But, in Pakistan, taking recourse to such schemes seems to have become a habit.

Experts have questioned both the rationale and timing of the move. The next elections are near and a new government will be in power which may scrape the scheme. Secondly, such amnesty schemes have not proved to be successful in the past. The last example of an amnesty scheme was one tried by ex-PM Nawaz Sharif himself in 2016, which was a dismal failure, with only 128 people participating in the scheme instead of the expected million.

In theory, an amnesty scheme seems a good idea, with the objectives of bringing in more tax payers, and money back into the country’s circulation, and effectively decreasing the deficit. In reality, it has often failed. This is because most of the assets abroad undeclared are not due to tax evasion, but assets beyond means, which if caught, could lead to seizure and punishment. Thus, instead of encouraging declaration and payment of tax, such amnesty schemes often play out to be smokescreens, to “whiten” money unaccounted for. The prime minister has attempted to get rid of the loopholes associated with amnesty schemes, by excluding public office holders; and providing lower income tax rates to encourage more taxpayers to enter the loop. While having a well-rounded economic package is an efficient move to include more potential tax payers, the question still lingers around this ill-timed initiative. The key component of an amnesty scheme should be the element of trust in the smooth running of the scheme, but with the government just on the edge of expiry, this scheme’s fate hangs in the balance.

Since the publication of Panama and Paradise Papers, offshore assets of Pakistanis have been in the limelight. Estimates with regard to the value of such assets abroad vary. Figures of $ 150 to $ 200 billion have been quoted. While there is no empirical evidence to support such estimates, the fact is that the law in Pakistan, since the advent of the Foreign Exchange Bearer Certificates introduced through the finance bill in 1985, followed by the Protection of Economic Reforms Act 1992 enacted during the first term of former Prime Minister Nawaz Sharif and Foreign Currency Accounts (Protection) Ordinance 2001,  progressively facilitated the transfer of funds (whether tax evaded or otherwise) to offshore destinations.

The Supreme Court, too, has taken suo motu notice of this matter and constituted a committee comprising among others, the governor of State Bank of Pakistan, and announced their terms of reference to suggest ways without creating economic upheaval to retrieve these assets from abroad. The report of this committee is awaited. Although, it would have been better for the government to wait for the apex court’s order, perhaps due to paucity of time, the government went ahead with the initiative. The results of similar amnesties launched by India, Indonesia and Malaysia recently seem to have been kept in view while formulating the tax rates for legitimizing such assets and allowing retention of such assets abroad by the people declaring their holdings.

Despite a glut of tax amnesties in the past, the country still boasts one of the lowest tax-to-GDP ratios in the region, a predominant reliance on indirect taxation because of the appallingly low number of income tax return filers that hovers around 1.2 million (of which only 750,000 pay tax). Not only that, whatever is collected as income tax, over seventy percent of it is collected through Withholding Tax, a cumbersome and elaborate maze of varying rates on different types of transactions for different juridical persons. The WT is invariably passed on in the sale price like an indirect tax. This has resulted in the creation and expansion of the informal sector within the country that is now almost at par in size with the formal or documented sector.

Drawing a lesson from the fact that previous tax amnesties did not result in enlarging the documented sector, the government has announced measures with a view to addressing this problem. Tax rates on individuals have been slashed substantially and all those that avail the amnesty scheme shall be enrolled as taxpayers as the declared focus is on broadening the tax base instead of a quick one-time increase in revenue.

There is complete unanimity of view within the country that real estate is the sector of choice for parking tax evaded funds and that there is a complete mismatch between the declared and actual transaction values of almost all real estate transactions. The proposed package seeks to address this malaise and instead of prescribing area-wise values to real estate, as is the practice currently, it leaves it to the discretion of the parties involved in the transaction, to declare whatever worth they ascribe to their asset with the caveat that the state would have the option to acquire at twice their declared value. The option for the state to acquire the property at a higher price than the declared value is a concept that has been in vogue in India for quite some time. However, for this measure to be implemented the provincial governments will have to be on board as registration of property transactions and stamp duty paid on such transactions constitute their exclusive domain.

A section of opinion in the country has opposed the amnesty on the ground that the OECD convention, of which Pakistan is a signatory along with over 100 other countries, has made it extremely difficult and risky for resident citizens to hold such assets abroad. This may be so for liquid assets such as bank accounts and bonds but the OECD convention does not cover fixed assets/real estate that constitute the bulk of offshore investment in terms of value.

The Pakistan People’s Party and PTI have announced their opposition to this scheme, arguing, among other things, that the incumbent government should not have taken such a major fiscal decision at the fag end of its five-year tenure. A final verdict is now expected from the apex court which has taken notice of the issue.