A country like Pakistan has weak institutional mechanisms to unearth its citizens’ undeclared assets and funds at home and abroad, much less bring them into the formal fold. A tax amnesty may be the best technical alternative available to achieve the same objective, provided it is done through a balance of carrots and sticks, its timing is right, people anticipate that the scheme would be one-time in a long time, and the scheme makes everyone file a declaration letter.
But the country has offered numerous schemes in the past and critics fear the fate of this scheme to be no different. There are two sides of lens to see this amnesty scheme. One is the cost of discouraging the honest taxpayers, as the clearance levies on undeclared assets are arguably too low, as well as the resentment of international lenders and donors and potential wrath of the FATF.
The other is to bring tax-evaders’ money back into the system by giving incentives at ridiculous rates. The objectives are to bring back the black money parked outside the country and to bring part of informal economy into the documented economy.
The overall reforms’ package introduced last week has the potential to provide one-time boost to the economy by bringing some foreign exchange back into the country, by transferring domestically-held foreign exchange in FE25 deposits into SBP reserves to improve the import cover, and to spur consumerism by increase in disposal income of individuals due to significantly low tax rates.
But the core of morally-questionable amnesties is to enhance the tax-base by penalizing the evaders in future. However, seeing the history of the country and moral integrity of PML-N, correcting the taxation system for good seems like day dreaming.
Without strong political will to bring non-tax paying individuals (retailers and traders) into the tax net and without having deterrence to tax evasion practices seen in forex and real-estate sectors, the scheme may prove to be an exercise of a declaration of some assets with no meaningful impact in the long run.
If the core vote bank of PML-N – urban retailers and traders – is not lured or forced to come in the tax-net after the reduction in income tax, the move of lowering tax would essentially become an effort to win the heart of urban salaried class just before the elections. That target audience is believed to be the core of PTI support in urban centers.
The timings of the scheme whilst clubbing both domestic and foreign asset declaration may have more political motives than a genuine effort to broaden the tax base. If the objective is political and the reaction of the opposition parties and institutions would be to stand against the scheme, it can have adverse consequences.
Announcing amnesty scheme is no joke. At first, it discourages the honest taxpayer, who is paying 30 percent tax, when s/he looks at tax evaders going almost scot-free with a 2-5 percent penalty. Second, it brings wrath of multilateral donors and lenders. The WB and IMF are not at all happy; and it’s important to have international lenders on board in days of tough balance of payment position.
The FATF has reportedly shown resentment that the government did not take the institution on board before announcing the scheme. The catch is how to weed out the black money from among the declared assets.
And last but not the least; it is critical how Supreme Court reacts to the scheme. The Chartered Accountants are pitching the scheme to their clients and recommending them to avail it.But Seth’s may only be willing to declare partial assets yet. And even before doing so, they would like to judge the reaction of judiciary.Time is already short and a wait-and-see policy by potential participants may result in inaction.
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