All tax amnesty schemes introduced in Pakistan since its independence, failed to yield any desired results. This was irrespective of political divide, including democratically elected regimes or those led by military dictators in Pakistan.
Insight
All tax amnesty schemes introduced in Pakistan since its independence, failed to yield any desired results. This was irrespective of political divide, including democratically elected regimes or those led by military dictators in Pakistan.
The amnesty schemes to whiten black money met with failure because tax evaders knew that existing loopholes within the system would rescue them and would not let government take stern action by the end of the day.
Despite failure of such schemes in the past, the incumbent Pakistan Muslim League-Nawaz (PML-N) government is again contemplating upon options to introduce a tax amnesty scheme at the twilight of its tenure, when the country would be heading towards embracing another general election in few months.
The ruling PML-N claims it would be different this time, as Pakistan has now officially become a signatory of the Organization for Economic Cooperation and Development’s (OECD) Multilateral Convention on Mutual Administrative Assistance in Tax Matters aimed at curbing growing tax evasion.
Pakistan and Switzerland also revised Avoidance of Double Taxation agreement and exchange of information became effective from January 1, 2018.
After surfacing of Panama Leaks and disqualification of former prime minister Nawaz Sharif, there has been growing demand for bringing back dirty money lying abroad, especially since Pakistan is facing difficulties on the external front of the economy. The biggest problem for the economic managers is to arrange financing for the current account deficit which might cross $14 billion in the current fiscal year 2017/18 against $12.4 billion in last financial year of 2016/17.
In the wake of these developments, the business giants are approaching the government to convince them for launching another amnesty scheme for bringing back money and assets lying abroad.
As a matter of fact, the whole economic team of Prime Minister Shahid Khaqan Abbasi has so far been unable to develop consensus on finalising prescriptions for the economic ills being faced by the country. Among these issues, the proposed amnesty scheme seems another bone of contention for different stakeholders.
However, one of the former finance ministers of Pakistan, Dr Hafiz A Pasha said he did not expect that the government would be able to launch any amnesty scheme at this juncture when the tenure was going to end in the next few months.
With the backing of Tax Reform Commission led by Masood Naqvi, the Federal Board of Revenue (FBR) has prepared initial draft for launching this proposed scheme. Under the scheme, only three to five percent tax can be paid for bringing back/regularising foreign assets of Pakistanis abroad, provided legal protection would be given from the National Accountability Bureau (NAB), and Anti Money Laundering (AML) laws in case of reversal of any such scheme.
It is a dilemma for the incumbent PML-N led regime to propose such a scheme at the end of their tenure. It is difficult to sell the scheme at such a juncture, and getting the constitutional guarantee with the approval of the parliament seems a tricky proposition because the government lacks majority in the senate.
However, many in the power corridors believe that if this government survived till March 12, 2018 and manages to hold senate elections, it would be able to secure a majority in the Upper House of the Parliament. If that happens, legislation could be done with the consent of the parliament to go ahead with launching this proposed scheme.
In the past, international financial institutions (IFIs) such as the International Monetary Fund (IMF) and the World Bank also opposed such amnesty schemes. Their argument was that it discourages honest taxpayers. This time around, with the ratification of the OECD convention, the tax authorities think the scheme would be a success. They are also keeping in view the current global environment against tax evaders and money launders.
However, such an amnesty could succeed only if the government of Pakistan placed certain prerequisites in the upcoming scheme. If that happens, there would be chances that the country attracts owners of foreign assets, who might prefer to regularize $4 to $6 billion assets lying abroad in different parts of the world.
Simultaneously, the government would have to work on increasing the tax base. To achieve that, it is must to build the capacity of the tax machinery and to grant the FBR autonomy.
Pakistan’s existing tax structure is highly flawed, and basically discourages documentation and promotes incentives for remaining outside the tax net. Despite differentiating filer and non-filers by categories and the constantly increasing cost of living for non-filers in recent years, people still prefer to remain outside the tax net. The tax machinery requires soul searching in order to ascertain its reasons.
Pakistan’s narrowed tax base, where income return filers are merely around one million out of the total 207 million populations, poses serious threat to the fiscal woes of the country. All governments have failed in their efforts to broaden this tax base in any significant manner.
The current National Finance Commission (NFC) Award finalised during the Pakistan Peoples’ Party (PPP) led regime had turned the tide in favour of provinces, and the share of provinces increased from 37.5 percent to 57.5 percent out of the total federal divisible pool (FDP).
It was a wrong move on part of the PPP-led regime to finalise the NFC Award first and then follow with the enactment of the 18th Constitutional Amendment in subsequent months. It is now up to the current government to maximise its efforts to generate more resources. In the current scenario, there is no way out.
First, there is need to plug loopholes in our taxation system as lacunas exist for providing room for tax evasion. The remittances and agriculture income tax is being used as an excuse for protecting tax evasion so these avenues should be plugged through coordinated efforts.
The tax authorities, including the FBR at the centre and provincial tax authorities require harmonising their rules, procedures and tax collection mechanism as well. If that does not happen, multiple tax structures would continue to burden and be cumbersome for businesses that operate and have to file returns in five different places each and every month.
Going forward, the government would have to demonstrate its political will in enforcing tax reforms by empowering tax machinery, and it would have to take corrective measures for increasing tax to GDP ratio. But if political compulsion continued to remain the top priority of the rulers, then no improvement could be achieved on this front.
The writer is a staff member
