Pakistan’s tax amnesty a crisis of conscience for the wealthy

Prime Minister Shahid Khaqan Abbasi seems pretty confident that his Tax Amnesty Scheme kills two birds with one stone — urgent tax reforms and record fiscal deficit — even though he had to sidestep Parliament and get it implemented through a presidential ordinance on Sunday. The back-door route caused quite a stir in the first session of the newly elected Senate, eventually causing an opposition walkout from the Upper House on Monday.

Any scheme that increases the income tax exemption threshold threefold, from Rs0.4m to Rs1.2m, while cutting maximum income tax rate from 35 per cent to 15 per cent (a 57 per cent difference), is bound to resonate with the approximately 4 to 5 million urban households that will benefit from a sudden increase in their disposable incomes. Whether or not it encourages more people to file taxes remains to be seen, but it will definitely make existing taxpayers a lot happier. And once they save and spend more, they will also increase consumption, which is welcome as long as they do not spend too much on luxury imports and put more strain on the deficit.

The ruling party will not mind, of course, if this tax incentivisation makes people count their savings and head to the polls to vote for PML-N, since this is the only quantifiable break the working middle class has, probably, ever received. The Press has already started quoting opposition politicians, ‘on condition of anonymity’, spilling the beans about growing concern among their leadership.

Then there is the bigger economic picture, particularly the highest-ever fiscal deficit, which has left the government with barely two months of import cover. The other part of the prime minister’s scheme, which allows voluntary repatriation of foreign held assets at 2 to 3 per cent penalty, is expected to bring a windfall to the tune of $5 billion. All that remains is legislation ensuring protection against future prosecution (after disclosure), and practically everybody will laugh all the way to the bank.

The government will have its five billion, people with illegal and undisclosed wealth abroad will escape the financial noose tightening around them in all parts of the world (even get much higher returns in Pakistan) and, more importantly for the government, the country will finally begin to move away from the ‘beg or borrow’ model that has characterised the finance ministry for decades. With the deficit constantly expanding and earnings showing no real sign of rebounding, there was talk of an outright collapse embarrassing the government just around election time and forcing a return to the Fund.

Now, should PM Abbasi’s scheme work, the government will have something big to sell to the electorate even though Abbasi’s star is unlikely to rise any higher within the party. There’s just one problem, though. In the present circumstances, where practically all regulators and governments are going after illegal money stashed in offshore havens, most would-be money launderers would salivate at the prospect of whitening their black money at only two per cent. But this might still be too short-term to lure any serious money.

Nobody has yet shed much light on the fact that this is only a one year thing. The 2 to 3 per cent gets to cleanse the money, and even route it into the local real estate and equity markets. But all of it will be taxed according to normal rates from the next year when the amnesty would have expired and the money would not be hidden anymore. That is not a prospect that generally appeals to the elite of the country’s most corrupt and explains, to an extent, why no amnesty has worked before despite inviting comparisons to Indonesia, India, etc. After all, at two per cent penalty, they will need to rein in big fish to put some shine on the foreign exchange reserves. Otherwise the exercise will only lend weight to criticism that, with only two months left, the government is facilitating money launderers, especially since the party’s senior leadership is facing similar charges.

Should Abbasi’s scheme work, the government will have something big to sell to the electorate even though the PM’s star is unlikely to rise any higher within the party

And failure to get the five billion will raise the possibility of another programme with the IMF — with all the ‘structural adjustment’ and ‘austerity measures’ — just when everybody is going to the polls. Opponents will, naturally, also ask the moral question that always comes in the wake of such amnesty schemes. Do they not make regular taxpayers, especially in an environment like Pakistan’s (which has one of the lowest tax bases in the world), appear silly for following the law when they, too, could have amassed fortunes then practically walked away scot-free?

Everybody will also be reminded that amnesty schemes are needed only when the government is unable to do its job of checking capital flight, stopping theft of money, collecting taxes and punishing anybody not obeying the law.

But all sins will wash away if it works, of course. So the fate of the PM, the ruling party, and the country’s forex reserves rests primarily on the conscience of some of the most corrupt money launderers of our country.