Desperate measures

Insight

The outgoing Pakistan Muslim League-Nawaz (PML-N) government has taken drastic tax measures at the twilight of its tenure which pose the risk of shattering the entire system of taxation in the country.

Prime Minister Shahid Khaqan Abbasi along with his Advisor on Finance Miftah Ismail unveiled an amnesty scheme for whitening of domestic and offshore foreign assets and reduced tax rates in a single go, something that had never happened up to such an extent in the history of Pakistan.

Multilateral institutions such as the International Monetary Fund (IMF) and World Bank too have always sternly opposed any kind of tax amnesty scheme with the argument that it discourages the honest taxpayers. It increases incentives for hiding taxes, as one waits for an opportunity to clean the ill gotten wealth through such amnesty schemes.

Some historical facts too cannot be ignored at this stage. No amnesty scheme in any part of the world can become successful without a strong legal framework. The effective writ of state can guarantee success of any amnesty. Sadly, in any part of the world, where there is no writ of state and rule of law, such amnesty schemes have never succeeded.

Since 1958, Pakistan has launched ten different tax amnesty schemes including the latest one. In the first such scheme in 1958, only 71,289 declarations were filed. After that, another scheme was launched in 1969 under which only 19, 600 declarations were made. It was followed with another scheme in 1976, but there is no data available for it. The government also launched a scheme in 1997 that fetched only Rs141 million in taxes. In 2000 only 79,411 declarations were filed. Under the 2008 scheme the government collected Rs2.8 billion. The 2012 scheme for funds invested in stock exchange; in 2013 around 50,000 non-duty paid vehicles were cleared, and in 2015 voluntary compliance scheme only 10,000 returns were filed.

This brings us to the recently announced 10th amnesty scheme.

If the nine schemes announced in the past failed to achieve the targets, why would this new scheme give the desired results?

One can find some arguments to support the amnesty scheme for the declaration of offshore foreign assets, keeping in view the strict regulations and ever tightening global financial system in the wake of measures taken by the Financial Action Task Force (FATF) and Pakistan becoming signatory of the Organisation for Economic Co-operation and Development (OECD) forum. The OECD’s exchange of information clauses will become effective from the upcoming financial year 2018-19 which would increase difficulties in keeping undeclared wealth in banks and offshore companies in any part of the world.

However, the government needs to deploy the carrot and stick approach if it wants the amnesty scheme to become successful. Failing which, the experts believe this new tactic would fail in a big way as well.

Only relying on the FATF as well as the clauses under the OECD would not bear fruit.

Pakistan had signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters with the OECD on September 14 last year.

This convention has a representation of 100 countries. The agreement would be fully activated in the year 2018-19.

This membership will enable Pakistan to receive and send information on tax data under automatic exchange and signal its commitment to fight tax fraud and evasion at the international level. This may help retrieve important bank accounts, dividend, and interest and asset ownership information from all signatories to the convention.

On bilateral level, Pakistan has signed agreements for avoidance of double taxation with almost 63 countries, based on the UN model, which is not binding on member states to share information on investments, banks deposits etc.

The information can only be shared on specific evidence when Pakistani authorities can provide authentic and specific data.

Though there has been a lot of talk since the PML-N came to power about Pakistanis holding over $200 billion in Swiss banks and several billions of investment in real estate sector in the UAE. Bringing all that money back has always been a difficult question to answer.

Is it even possible to bring these stashed funds back from destinations like British Virgin Islands, Cook Islands, Singapore, the UAE and Switzerland?

When Prime Minister Shahid Khaqan Abbasi unveiled the amnesty at the press conference the other day, he was asked about the policy regarding reward and punishment under the scheme. In response, the prime minister had said that the parliament would take decision to this effect.

When former deputy chairman of the Planning Commission and renowned economist Dr Nadeem Ul Haq was contacted, he said that there was no need to launch this amnesty scheme, as it has failed in the past and was bound to fail again this time.

Instead of focusing on taxes, which was basically the mantra of the international donors such as the World Bank, the tax to gross domestic product (GDP) ratio was calculated in a faulty way. The GDP was revised upwards after rebasing, so tax to GDP ratio declined ultimately because taxes could not go up at such an accelerated pace.

“By including all taxes, Pakistan’s tax to GDP ratio touched close to 15 percent,” he said, and added that there was need to slash down the expenditure side.

The senior economist said that overlapping of institutions and ministries in the aftermath of the 18th constitutional amendments needed to be abolished at the centre. “It required full implementation on 18th amendments in its true letter and spirit,” he added.

He raised questions on the ministries and institutions that have been retained at the federal level after devolving those subjects to the provinces. “Without rationalising expenditures we cannot find out solutions,” he reminded.

Dr Nadeem Ul Haq also held the bureaucrats responsible, pointing to their vying for perks and privileges. He also said there was no need for such massive public sector development programmes (PSDP). The PSDP resources, he alleged were utilised for the construction of houses and bungalows in the name of development. “They are meant for the luxurious life of these bureaucrats” without improving governance structure, the mantra of increasing tax to GDP ratio will lead us nowhere, he concluded.

Dr Nadeem Ul Haq is not the only one arguing against the scheme. Many argue against the amnesty and have claimed there is no justification for launching such a scheme at this political juncture. The Federal Board of Revenue (FBR) on the other hand argues that the demand was made by the business community to give this incentive package to the domestic evaders as well.

But the amnesty scheme is not the only problem here. The government undertook massive cut in the rate of income tax and also reduced the tax burden on property by doing away with the valuation mechanism with just one percent tax.

This sudden change means that more than half a million taxpayers will be excluded from payment of tax from the next fiscal year. Around 521,000 taxpayers will pay zero tax from the next fiscal year.

Tax experts believe that the reduction in income tax rates should have been done in a gradual manner because the existing shock will shake up the FBR’s tax structure.

The FBR has now been left with no other option but to seriously kick-start broadening of the narrowed tax base in an effective manner.

Earlier, the FBR had initiated Broadening Tax base (BTB) as merely eye wash. After the exclusion of 0.5 million taxpayers and doing away with Income Tax (IT) section 236 related to taxes on property, the relieved FBR staff should now be assigned with the task of actually broadening the narrowed tax base in a big way.

The writer is a staff member