Taxation in trouble

The issue the government made the most noise about in tax collection has hit a snag. While claims about how much money had been laundered out of Pakistan were already questionable, the FBR chairman had to admit another straightforward fact before the National Assembly (NA) Standing Committee on Finance and Revenue last week. FBR head Shabbar Zaidi confirmed that remitting money out of Pakistan and creating assets abroad is not ‘illegal.’ If anything, it is protected under the Foreign Currency Accounts Ordinance 2001. But even if we were to step outside the realm of law, Pakistan relies on tens of billions of dollars in remittances each year; if Pakistan was to begin to outlaw remittances from Pakistan and wealth creation by Pakistanis abroad, it could face a crackdown in the opposite direction. Foreign governments could begin to claim that Pakistani workers abroad cannot remit money to Pakistan, which would deepen the existing crisis in the country’s foreign currency reserves.

The FBR has merely collected Rs5 billion from 325 biggest cases of Pakistani’s with assets over one million dollars abroad. Does this mean that this exercise has been a massive waste of time for both the government, the FBR and the public? And what about the larger taxation drive in the country being led by the FBR? The NA Standing Committee maintained that the FBRs position is in conflict with the SBP position on the issue of money sent out of Pakistan – and this still does not solve the issue of what money sent abroad is legal and what is not. The FBR says it has received data about 57,550 cases under the OECD cooperation mechanism, which is a fairly high number, but most of the cases appear to not have any legal grounds for prosecution. Out of the 325 biggest cases, 135 individuals chose to avail the amnesty scheme by choice, but the legality of taxing the income of Pakistanis abroad itself needs clarification.

It is clear though that the last two amnesty schemes have failed, with collection standing at only Rs5.5 billion. Does the FBR declaration mean that the pursuit of foreign assets abroad is now dead? This will remain to be seen. The NA is not willing to compromise on the issue, but the FBR has raised technical questions which go beyond the politically charged rhetoric around the issue. The right of Pakistanis to earn and send money abroad has to be respected, but any money laundered illegally must be brought back or – at least – taxed. It appears that this is an issue that has not been looked into before now.