Amnesty scheme

The Pak Banker - - FRONT PAGE -

The gov­ern­ment has an­nounced a tax amnesty scheme aimed at broad­en­ing the rev­enue base. The pol­icy is meant to whiten un­de­clared as­sets at home and abroad, re­duc­tion in in­come tax rates for ex­ist­ing tax­pay­ers and is­suance of dol­lar-de­nom­i­nated bond. Ex­perts have ques­tioned both the ra­tio­nale and tim­ing of the move. The next elec­tions are near and a new gov­ern­ment will be in power which may scrape the scheme. Se­condly, such amnesty schemes have not proved to be suc­cess­ful in the past. The last ex­am­ple of an amnesty scheme was one tried by ex-PM Nawaz Sharif him­self in 2016, which was a dis­mal fail­ure, with only 128 peo­ple par­tic­i­pat­ing in the scheme in­stead of the ex­pected mil­lion.

Since the pub­li­ca­tion of Panama and Par­adise Pa­pers, off­shore as­sets of Pak­ista­nis have been in the news. Es­ti­mates with re­gard to value of such as­sets abroad abound. Fig­ures of $ 150 to $ 200 bil­lion have been quoted in this con­nec­ton. While there is no em­pir­i­cal ev­i­dence to sup­port such es­ti­mates, but the fact is, that the law in Pak­istan, since the ad­vent of the 'For­eign Ex­change Bearer Cer­tifi­cates' in­tro­duced through the fi­nance bill in 1985, fol­lowed by the 'Pro­tec­tion of Eco­nomic Re­forms Act 1992' and 'For­eign Cur­rency Ac­counts (Pro­tec­tion) Or­di­nance 2001', has pro­gres­sively fa­cil­i­tated the trans­fer of funds (whether tax evaded or oth­er­wise) to off­shore des­ti­na­tions. The Supreme Court too has taken suo motu no­tice of this mat­ter and con­sti­tuted a com­mit­tee com­pris­ing among oth­ers, the gover­nor of State Bank of Pak­istan, and an­nounced their terms of ref­er­ence to sug­gest ways with­out cre­at­ing eco­nomic up­heaval to re­trieve these as­sets from abroad.

In the­ory, an amnesty scheme is a good idea, with the ob­jec­tives of bring­ing in more tax pay­ers and money back into the country's cir­cu­la­tion, and ef­fec­tively de­creas­ing the deficit. In re­al­ity, it has of­ten failed. This is be­cause most of the as­sets abroad are not due to tax eva­sion, but as­sets be­yond means, which if caught, could lead to seizure and pun­ish­ment. Thus, in­stead of en­cour­ag­ing dec­la­ra­tion and pay­ment of tax, such amnesty schemes of­ten play out to be smoke­screens to whiten money un­ac­counted for. The Prime Min­is­ter has at­tempted to get rid of the loop­holes as­so­ci­ated with amnesty schemes by ex­clud­ing pub­lic of­fice hold­ers; and pro­vid­ing lower in­come tax rates to en­cour­age more tax­pay­ers to en­ter the loop. While hav­ing a well-rounded eco­nomic pack­age is an ef­fi­cient move to in­clude more po­ten­tial tax pay­ers, the ques­tion still lingers around the ill-timed ini­tia­tive. The key com­po­nent of an amnesty scheme should be the el­e­ment of trust in the smooth run­ning of the scheme, but with the gov­ern­ment near­ing its term, this scheme's fate hangs in the balance.

De­spite such a glut of tax amnesties, the country still boasts one of the low­est tax-to-GDP ra­tio in the re­gion, a pre­dom­i­nant reliance on in­di­rect tax­a­tion be­cause of the ap­pallingly low num­ber of in­come tax re­turn fil­ers that hov­ers around 1.2 mil­lion (of which only 750,000 pay tax) in a pop­u­la­tion of well over 200 mil­lion peo­ple.

Not only that, what­ever is col­lected as in­come tax, over seventy per­cent of it is col­lected through With­hold­ing Tax, a cum­ber­some and elab­o­rate maze of vary­ing rates on dif­fer­ent types of trans­ac­tions for dif­fer­ent ju­ridi­cal per­sons that is in­vari­ably passed on in the sale price like an in­di­rect tax. This has re­sulted in the ex­pan­sion of the in­for­mal sec­tor within the country that is al­most at par in size with the for­mal or doc­u­mented sec­tor now.

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