The government has committed to include sales tax and income tax crimes in the Schedule of Offences in the Anti-Money Laundering Act 2010 (AMLA) under a new structural benchmark in the second review of the $6.4 billion Extended Fund Facility by the IMF. This was revealed in the IMF staff report on the second review under the extended arrangement issued on Friday.
The government committed to enact amendments to the relevant tax laws (as defined in the TMU) and submit amendments to the AMLA to Parliament. The "relevant tax laws" in the structural benchmark on "enactment of amendments to the relevant tax laws and submission of amendments to the Anti-Money Laundering Act (AMLA) for end-June 2014," is defined as follows: Income Tax Ordinance, 2001; the Federal Excise Act, 2005; the Sales Tax Act, 1990; the Customs Act, 1969; and any other relevant law.
The review adds that the IMF Staff "encouraged the authorities to mobilise the AML framework to enhance tax compliance and mitigate abuse of the tax amnesty scheme." In order to enable the use of AML tools to combat tax evasion, a list of serious tax offences are being identified and enactment of amendments to tax laws and submission of the AMLA amendments to Parliament will be completed by end-September 2014 (a new structural benchmark). Staff also encouraged the authorities' financial intelligence unit to issue guidance to financial institutions and the FBR to detect potential cases of abuse of the tax amnesty scheme to launder criminal proceeds by end-June 2014.
The IMF staff review notes that Pakistan's current listing by the international Financial Action Task Force (FATF) creates costs on financial intermediation because of heightened due diligence requirements by international financial institutions.
Authorities should mobilise the AML framework to mitigate abuse of the tax amnesty scheme and to more generally help improve compliance, the review maintains. In the longer term, tax policy and tax administration reforms will not only improve the fiscal stance -they will improve equity and thus enhance legitimacy; they will create fiscal space for higher social spending and more infrastructure investment; and they will encourage more private investment by improving the business climate. Moreover, more determined enforcement actions against other non-payers may also help maintain popular support for tax reforms, as there is strong sentiment in favour of bringing those who don't pay into the system, the staff review adds.
The IMF staff report also disclosed that the government has also committed to introduce electronic monitoring and tracking of goods, particularly cigarettes to avoid tax fraud by manufactures. The authorities' plans to strengthen sales, customs and excise taxes include a series of initiatives including: (i) clean-up of the sales tax registration system, by elimination fictitious or inactive registered firms; (ii) expansion of the sales tax net through registering more informal firms ; (iii) the full implementation of a computerised risk- based evaluation system (Crest); (iv) the automated sales tax refund-on a FIFO basis; (v) a tax gap analysis for major sectors; (vi) electronic monitoring and tracking of goods, particularly cigarettes, to avoid tax fraud; (vii) the improvement of the customs clearance system (WeBOC) - including an independent audit; (viii) making the risk management unit operational; (ix) addressing customs under invoicing by developing valuation rulings for further commodity groups; (x) mitigating transit risks from transit trade to Afghanistan through an integrated transit trade management system; and (xi) strengthening the post clearance audit unit.
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