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.