Amnesty — domestic assets to benefit

The amnesty scheme announced in April has gained creditability after nine weeks as finally the fear of apex court nullifying the scheme is over. The architects of the scheme have left Islamabad; while the FBR which was initially reluctant to accept the scheme in letter and spirit, is now under the caretaker setup marketing for declaration of assets.

Some say the scheme needs extension from expiry date of June 30, as little less than two weeks after Eid holidays are not enough. While others are of opinion that those who have shown interest in the offer have done their home work and were waiting for the court’s nod.

So far the buzz is that around one thousand people have declared the assets whereas former finance minister Miftah Ismail in an interview to BR published today inferred that 1.2-2 million non-filers have potential to gain from this scheme. He thinks there will be queues outside the FBR office after EId to avail the scheme.

The gap is huge and the incentives on papers are on the dot for non-filers to declare and be part of the formal economy. However, the fear of stick ought to be there for a meaningful gain from the offering.

One inherit deterrent in the scheme is that non-filer cannot buy real estate or car from the next fiscal year. The other more potent disincentive to under-declare real estate is that government can buy the property at certain premium to declared value.

These two steps in isolation can compel all to accept the scheme if it the law is implemented in letter and spirit. However, rumors are that in Karachi, the PTI folks are ensuring real estate tycoons and dealers that they may undo property buy back clause, if in power.

And to date, there is no mechanism of valuation and methodology to buy back property. There is a good chance that FBR and DC valuation may continue from 1st July 2018; and the other fear is that there will be two market values of real estate with declared property to trade at premium. This is happening n Mumbai and can well be a reality in Karachi.

People may opt for the scheme but this may not stop tax evasion in future. The economic potential of assets stuck in grey area can be unlocked once declared in the scheme. But since the stick of the FBR, to deter from evading taxes, appears weak, informal economy may start growing again.

There are different estimates on the money to be declared. Miftah expects it to be nothing less than Rs350 billion while a tax consultant from Karachi expects the toll to be around Rs500 billion. Another accountant from Lahore is bullish on declaration to cross Rs1 trillion and around Rs50-100 billion can be fetched by the FBR to nullify the revenues loss incurred due to low taxes on salaried class.

An interesting perspective from a ‘saith’ is that they may over declare undeclared assets and pay tax in cash on declaration. The modus operandi in filing tax by businesses is that they declare around 50 percent of income and rest is undocumented.

They are now thinking on declaring potential tax evasion in the future i.e. to pay 5 percent on future income where actual tax liability could be 15-25 percent. Anyway, whatever gimmick they may use, the declared assets can be put to better economic use.

There is one caveat - those evaders who still think that the scheme is not good may go more informal. Thus there can be adverse consequences (For details read: Unintended consequences of amnesty published on April 25, 2018). Informality in the economy can grow further; thus the stick of FBR is of utmost importance in future.

What happens to the foreign assets declaration and dollar bonds which were supposed to be offered? The timing is good as the currency is depreciated and it makes sense to convert these into rupees. However, rules and regulations are yet to be finalized by the SBP; and the fear of courts asking questions on bringing money back home still exists. Bottom line is that there would be success on domestic assets and this could have a multiplier impact on the economy.