A new tax amnesty scheme of the government in its last days in power is an admission of its absolute failure. The government has announced it after its economic bubble popped by some recent reports on Pakistan’s key indicators. The suspicious timing and limited scope of the package indicate it is just window-dressing to cover up the weaknesses of the economy.
According to experts, 65pc of Pakistan’s economy is still undocumented, only 0.4pc of the population pays taxes and over $10b is laundered out of the country annually. A massive increase in the income tax exemption slab and lowering of the maximum tax rate to 15 per cent from 35pc for salaried and non-salaried individuals will likely to cause over Rs90 billion losses to the national kitty. Instead of widening the tax net, the so-called economic package of the government is likely to wipe out nearly 521,000 taxpayers from the net. The government has also announced unprecedented relief in income tax rates to superrich people. It is feared the package may cause harm to the country instead of any economic benefit.
The most surprising move is to enhance the exemption limit to Rs1.2 million from the existing Rs400,000 when the government is about to complete its tenure on May 31, 2018. According to independent observers, it is pre-poll rigging, aimed to woo voters ahead of elections at the cost of national interests. According the Federal Bureau of Revenue (FBR), if the package is implemented in its current shape, it will halve the number of existing taxpayers, who would disappear from the tax net automatically. The income tax system has already deteriorated owing to increasing reliance on withholding taxes. Most economists view withholding taxes in the current shape hit the poor the most.
The timing and limited scope of the amnesty package for foreign and domestic undeclared assets are also suspicious. They raise doubts about its credibility and purpose, at a time when a rejuvenated National Accountability Bureau (NAB) is investigating high-profile corruption cases and a caretaker government is a few months away. At the time of its announcement, Prime Minister Shahid Khaqan Abbasi said the reforms aimed at clamping down on tax evaders. “Only 1.2 million Pakistanis file income tax returns and of them, only 700,000 actually pay tax, while others file returns but pay no income tax,” he said and hoped the incentives would invite more people to enter the tax net. Under the tax reforms package, Computerized National Identity Card (CNIC) numbers will be made National Tax Numbers (NTN) to monitor tax compliance of all citizens. Income tax brackets and percentages will be revised and there will be complete tax exemption on an annual income up to Rs1.2m. The maximum percentage of 15pc will be levied on an income above Rs4.8m per annum. Undeclared assets, held locally or abroad, can be declared after payment of nominal penalties. Those, who avail the scheme, will be granted one-time exemption from accountability laws. Tax to be collected on all property transactions will be made uniform. The government will have the right to purchase any property by paying 100pc over and above its declared value within six months of its registration. The government will monitor citizens’ financial records and issue notices if its finds evidence of tax evasion and penalties will be decided in the parliament.
Some experts say the main issue is not tax amnesty but protection from criminal prosecution after having made the disclosure. Legislating for protection from law enforcement, which will retain the right to ask about the source of the funds declared under the scheme to determine if they are the proceeds of crime, is almost impossible because the Supreme Court has already ruled in the NRO case that criminal activity cannot be absolved through legislation, they noted. No one can believe the government that they will be safe under the scheme, considering that the government has left with only two months. There is also no alternative for the government on foreign assets of Pakistanis. The government does not have access to data or any mechanism to identify, seize and repatriate foreign assets and in the circumstances, no one will intend to track them down willingly, they observe. With a 2pc penalty, if the government wishes to collect $100 million, it will need at least $5 billion to be declared through the scheme. Assuming an average amount of $2m being declared per person, 2,500 people will need to avail the benefit of the scheme, which is highly unlikely.
Economists say the government should expand its information on income and wealth records and move towards broadening the tax base. Exemptions provided to select sectors may be reconsidered and gradually eliminated. If the government is really serious about bringing back undeclared incomes and wealth from abroad, it should make efforts to operationalise the already signed cooperation agreements with countries where ill-gotten wealth exists. As usual, the government’s strategy is to persuade rich tax evaders into whitening untaxed assets at nominal rates, instead of announcing any major policy initiatives for fundamental reforms in economic structure that can solve pressing issues, like resource mobilisation, fiscal and current account deficits, low exports, rising imports, low foreign exchange reserves, surging debt, expensive energy and unemployment.
It is a fact that the present government has mismanaged its five years and failed to act upon many reasonable suggestions to overhaul the tax system and raise revenue at the federal and provincial levels. The plan to raise revenues through lowering of tax rates can only succeed through strong enforcement. The government also failed to reform the Federal Board of Revenue (FBR). Enforcement of tax laws without any fear or favour should have been the top priority of the federal and provincial governments but they had political reasons for inaction. The government has relieved only on borrowing to run its affairs instead of economic reforms, which was its manifesto. The result is every Pakistani owes Rs130,000 now and losses of public sector enterprises, including the Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM), have exceeded Rs1.2 trillion and circular debt of the power sector has reached over Rs1 trillion. The new economic scheme is a gimmick to cover up its failure to check losses, expand the tax net, curb tax evasion, corruption and money laundering.