Given that the PTI’s tax amnesty scheme has little new to offer, it is unlikely to lead to any meaningful change in taxpayers’ behaviour or to substantially increase the size of Pakistan’s documented economy
On May 15, President Arif Alvi promulgated an ordinance to implement a new tax amnesty scheme with a deadline of June 30, 2019 -- end of the current Fiscal Year (FY) -- for asset declaration. Under the scheme, assets within the country and abroad (except for real estate) can be "whitened" or legitimised on payment of a nominal penalty of 4-6 percent of total value.
The scheme also facilitates citizens to whiten their Benami accounts and properties. For declaration of real estate assets, the government has hiked the evaluation rate of property to the tune of 150 percent of the notified rate of the Federal Board of Revenue (FBR). Every Pakistani citizen can avail the scheme except for those who have held public office. There is a one-year window for tax payments by those who declare their assets by June 30.
The government has made no revenue projection for the scheme. The PM’s Adviser on Finance, Abdul Hafeez Shaikh, has claimed that "the basic purpose of the scheme is not to generate revenue but to document the economy and to bring dead assets into the economy and make them functional." That the FBR has missed the indicative target on tax revenue for the first ten months (Jul. 2018-Apr. 2019) of the ongoing FY by almost Rs345 billion leaves little room for tagging the scheme as a "documentation" exercise.
However, there are the moral and intellectual dimensions of the tax amnesty culture -- the latest scheme is the fifth one offered to tax evaders since 2013. In fact its broad contours are similar to the 2018 scheme announced by the outgoing Pakistan Muslim League-Nawaz (PML-N) government which was widely seen as "successful" by garnering a revenue of almost Rs122 billion. Regardless of whether Pakistan Tehreek-i-Insaf (PTI)’s scheme achieves similar "success", such amnesties are ill-suited for a nation already mired knee deep in moral degradation and intellectual poverty.
The intellectual dimension of amnesties is somewhat academic but very relevant. As a general rule, nobody wants to pay taxes, and wouldn’t if they knew that they could get away with it. The regular tax shortfall in Pakistan hence emphasises the urgency of the complex task of improving the tax apparatus. An analysis of the pros and cons of the possible options for FBR reform and respectable collection of provincial taxes needs separate treatment.
The focal point to note is how comprehensively and for how long we seem to have run out of ideas on the economic front. Even PTI which had promised a structural revolution in the country’s political economy has not backed up its platform with a semblance of intellectual depth.
Tax compliance has not increased despite a succession of amnesty schemes, and one can safely say that incentives to evade taxes have remained in place. Given that PTI’s scheme has little new to offer, it is unlikely to lead to any meaningful change in taxpayers’ behaviour or to substantially increase the size of Pakistan’s documented economy. At its best, the latest scheme indicates the new government’s growing recourse to gimmickry and the employment of stop-gap measures to try to plug structural holes in the economy.
The limited capacity to govern is visible in the choice of the economic team. Is a spent adviser of the under-performing Pakistan People’s Party (PPP) government the best economic guru that a party that claims to have studied and contemplated reform for 22 years can come up with? We are short of solutions, admittedly not just in case of the economy. However, the continuation of bad economic governance is especially alarming. It can squeeze the masses and make incumbents unpopular very swiftly and intensely in a poor country.
The moral component of amnesty culture is probably the more obvious one. Any tax amnesty scheme is intrinsically unfair to law-abiding taxpayers who have been faithfully paying their taxes. Research suggests that a tax amnesty can be justified only as a unique event. If the citizens of a country expect there to be more than one amnesty, they have little or no incentive to report or redress an offence immediately. In fact, because they expect a future amnesty, they have an incentive not to pay current taxes. In simple words, the stick needs to be bigger than the carrot on offer for tax evaders -- the amnesty has to be accompanied by the increased likelihood of detection -- to impart a fig of morality to the concept.
In Pakistan, however, all tax amnesties have been the harbingers of one clear message: do not pay taxes, another amnesty is just around the corner. Amidst the "wise" discourse about the revenue potential of amnesties, we need to spare a thought about how such schemes subject honest taxpayers to ridicule with lasting impact on society and politics.
The rejection of moral considerations, as demonstrated by an amnesty scheme sans intent to seize undeclared and untaxed assets in case a defaulter snubs the offer, is a double whammy for PTI. The party garnered at least a portion of its votes in the 2018 elections, including those from the urban middle class, on the basis of its strong anti-corruption narrative. The PTI leadership opposed all previous tax amnesties -- not on narrow technical grounds, but on a point of principle.
However, now the PTI government, like those in the past, has not explained the sticks it will use to go after individuals who refuse to declare their assets. Claims of "documentation", using "data" and "automation" have been made in the past as well with no impact. There is no evident reason to assume this time it will be any different. However, there is a reason to forecast that the credibility of the accountability slogan of PTI will shrink further.
The absence of sustained criticism by opposition parties on the amnesty scheme is notable. The muted response is self-explanatory about our elite’s consensus on the amnesty culture. Ruling elite extract resources by abusing power and then use these resources to further preserve/expand their hegemony. They get away with not paying their fair share of taxes, knowing that "governments" populated and influenced by their own ranks will sooner or later grant them an amnesty imposing a minimal burden.
In fact the threat of a crackdown gets diminished for Pakistan’s rich and powerful with every new amnesty scheme. The prime question is: why are the elite allowed to evade taxes but there is an expectation that while the elite continue to protect each other the exposed commoner would willingly step in to pick their burden? The PTI government has to come up with a satisfactory answer. Otherwise, like the previous governments, it will end up sealing its legacy as a helpless entity before "state capture" by the civil and military elite with little will and capacity to enforce laws and develop institutions that may hurt the elite.