Tax amnesty

Last week the Federal Finance Minister said that the tax-amnesty scheme prepared by him has been approved by the Prime Minister and the Federal Cabinet. The proposed law, that will legalise the amnesty, will be called Tax Registration Enforcement Initiative-2012. Those who choose to avail the benefit of the scheme will have immunity under the Federal Investigation Agency Act-1974, Companies Ordinance-1984, National Accountability Ordinance-1999, and the Foreign Exchange Ordinance-2002. Three cheers for all of them!
A fractional fixed tax will legalise undeclared wealth up to Rs 5 million. The logic supporting this proposal was the grossly low tax-to-GDP ratio, increasing which had become imperative (because of criticism thereof by the IFIs), and the daunting fiscal deficit.
According to the SBP, in the last four fiscal years, public debt more than doubled over its level accumulated in the previous 60 years. What, however, is amazing is the fact that in the same four fiscal years, when public borrowing broke all records, nothing changed for the better.
Resort to tax amnesty schemes is a desperate option reflective of sustained collective failure of all the tax collection agencies - federal, provincial and local. Such schemes legalise not just hidden wealth, but also the illegality of the sources that generated it. The fact that this kept happening periodically establishes this reality. Such schemes discouraged a move towards engaging in legal activities and criminal elements cited them as their periodic successes in eventually forcing the government to surrender.
Yet, to avoid its criticism, it is being claimed that "the scheme may not be taken as a safety net for those who have not complied with tax laws but as a trampoline which will provide buoyancy to the national economy and deepen and broaden the tax base."
The amnesty schemes launched in the past didn't focus on containing tax evasion; all of them were triggered by severe financial crises, which Pakistan faces periodically courtesy sustained bad governance of its economy, and were focused on generating resources enough to barely survive.
All amnesty schemes exposed a tendency for expediency, with zero concern for changing the mindset of the tax-evaders and money launderers, and thus on generation of black wealth, and its being stashed away, or on Pakistan's worsening risk perception abroad.
Many system improvement steps taken by the FBR were attributed to guidance of the IMF. What is worrying is that even the IMF-inspired changes in the tax recovery initiatives failed to induce the desired responses from the undocumented sectors of economy.
The currently proposed amnesty scheme reflects the failure of these efforts and a dangerous compromise, with serious implications for the morale of the honest tax filers. Indications of how widespread are the dimensions of this compromise are far more disturbing.
One of the businessmen consulted by the IMF says that, apparently, IMF's main concern over the amnesty scheme isn't the return of the funds accumulated abroad through under- and over-invoicing of foreign trade transactions; it is over the return of the wealth earned from trading in drugs and arms.
The critical gap in the amnesty scheme is that it doesn't require declaring the sources of undeclared wealth to segregate the wealth accumulated from business activities and that from dealing in arms and drugs, and bar this part of the wealth from availing the benefit of the amnesty scheme.
This wealth's becoming a part of the total wealth would permit the anti-Pakistan elements to claim that all the wealth in Pakistan is terrorism-generated, which would be the biggest single damage ever done to a country that is struggling to remove this label from its forehead.
FBR had told the IMF team that the amnesty scheme could benefit from the expected inflow of the assets held abroad by Pakistanis because some governments were looking at the option of barring resident Pakistanis from having bank accounts in their countries.
But that's not true in case of all governments; some are still welcoming black wealth and such wealth could go into their banks. Besides, the less well-regulated and financially stressed countries would be more than willing to absorb wealth having any profile.
Besides, the black wealth holders sent their wealth abroad on expert advice; these experts will now advise them on what to do. It is no secret that these experts operate openly, and advertise the services they offer in well reputed financial newspapers and magazines with global circulation.
Pakistan's falling exchange reserves are a bad omen. What make the scenario worse are the escalating trade and balance of payments deficits due to falling exports primarily because of energy and power shortages, and a collapsing administration that is fuelling pervasive lawlessness.
This is making Pakistan an unattractive country for investment, especially inflow of investment from abroad. Predictions about the likely fiscal deficit are shocking. Against a target of 4.5 percent, this deficit may cross 6.5 percent of the GDP making Pakistan a far less attractive country for foreign investment flows.
Add to this the negatives that will come with the tax amnesty scheme, and what you have is a horrifying picture. At this point, should we have gone for a tax amnesty or drastically improved taxation policies and collection mechanisms to make them more taxpayer-friendly?
Amnesty schemes aren't the prudent alternative; instead of encouraging above board business activities, they induce a fresh round of black wealth accumulation, thereby sustaining fiscal stress and then getting legalised the black wealth earned in the next round.
The solution lies in revamping taxation policies, monitoring systems, collections mechanisms and, above all, delivering services in return for the taxes collected. The in-power regime did nothing of the sort, and like the earlier incompetent regimes, opted for another tax amnesty scheme.
Ministry of Finance and the FBR can't deny that they were not advised comprehensively on all these aspects. As early as 1997, like many others, I too drafted a complete set of proposals that were presented to the then Prime Minister Nawaz Sharif, but nothing was changed.
Interestingly enough, while the government is preparing to legalise ill-gotten wealth, SBP has issued a revised set of anti-money laundering regulations that became effective November 1, 2012. This scenario portrays an odd contrast in the country's administrative strategy.
The revised SBP regulations go to the extent of saying that even those who visit a bank to exchange currency notes of small denominations for notes of large denominations should be treated as possible money launderers. Perhaps the FBR and the SBP are on two different planets.