Amnesty schemes

Tax amnesty schemes have been extremely popular with our finance ministers - irrespective of whether they operated within civilian or military dispensations and irrespective of whether they were qualified economists or not.
Dr Mahbubul Haq continues to be remembered for launching his annual human development report in 1990, still published annually and in use by UNDP for its annual Human Development Reports. He was a highly qualified economist with degrees from the world's premier institutions that included Cambridge and Harvard. And as the country's finance minister and planning minister from 1982-1988, during the military dictatorship of Ziaul Haq, he was perhaps the first who learnt to his chagrin that 'naming and shaming' does not work on Pakistan's elite. Thus identifying that the '22 families' that were dominating the financial and economic life of Pakistan and referring to 'feudals' as non-taxpayers did not enable him to either bring these rich and politically influential families/individuals into the tax net or close the loopholes in the tax system. A more recent example is the naming and shaming by Ishaq Dar through uploading the actual taxes paid by parliamentarians (as well as income tax paid by all in the country) on the Federal Bureau of Revenue's (FBR) website that has changed little and the FBR does not even bother to separate the data for parliamentarians.
However, Dr Haq tapped into the massive demand for foreign exchange by the country's elite and issued Foreign Exchange Bearer Certificates (FEBCs) which did not question the source of funds (and could be legally taken out of the country) with the yield posted on the stock exchange. A paper titled "Analysis of the Yield on Foreign Exchange Bearer Certificates: Rationality and Financial Behaviour in Pakistan" by Abdel-Motaal published in December 1994 as IMF working paper 94/156 (no longer available on the Fund's website) concluded "a seemingly perverse relationship persists between instruments that, in principle, should command identical returns and positive valuation of instruments that deliver negative real and effective returns. Rupee denominated assets such as administrative controlled bank deposits, federal investment bonds, and treasury bills were paying negative average real returns during the period under consideration. Dollar denominated foreign currency accounts generally also paid negative exchange rate adjusted returns... a reduced form model for FEBC yield is specified as an equilibrium relation between this yield and the returns on local and foreign substitutes, inflation and devaluation expectations and regulation proxies... adjusted nominal and real yield series (were) constructed indicating that a rational interest rate structure underlies regulation laden rates of return. The FEBC has been paying an adjusted yield that is positive in real and effective terms and that, on average, is well above LIBOR." It is no wonder that subsequent to the issuance of FEBCs defence expenditure began to be over-taken by debt servicing costs.
Western countries including the US and the UK do not allow their residents to hold foreign currency accounts while expatriates and foreigners can hold say a dollar account in the UK yet he/she will earn no interest on such an account. In Pakistan, the Nawaz Sharif administration in 1992 passed the Protection of Economic Reforms Act that reaffirmed the principle behind Dr Haq's FEBCs: "freedom to bring, hold and take out foreign currency (for) all citizens of Pakistan resident in Pakistan or outside Pakistan... (and) all citizens of Pakistan resident in Pakistan or outside Pakistan who hold foreign currency accounts in Pakistan and all other persons who hold such accounts shall continue to enjoy immunity against any enquiry from the Income Tax Department or any other taxation authority as to the source of financing of the foreign currency accounts."
Musharraf in 2001 promulgated an ordinance that stated "No person holding a foreign currency account shall be deprived of his right to hold or operate such account or in any manner be restricted temporarily or permanently to lawfully sell, withdraw, remit, transfer, use as security or take out foreign currency there from within or outside Pakistan. No suit or other legal proceedings shall lie against the Federal Government or any person for anything in good faith done or intended to be done in pursuance of this Ordinance or any rule, direction or order made there under"; and the ordinance was clear that "protection provided to a foreign currency account holder under this Ordinance shall be in addition to and not in derogation of the protection provided under the Protection of Economic Reforms Act, 1992 (XII of 1992)". This ordinance continues to be implemented to this day.
In addition, former governments periodically announced tax amnesty schemes on domestic undocumented sources of income with little if any success. The incumbent Sharif administration has announced two amnesty schemes in less than three years. The first one announced end 2013 early 2014 prompted the IMF in its second review under the recently completed 6.64 billion dollar Extended Fund Facility to state that: "The package seeks to improve the investment climate through reducing tax scrutiny. The package opens another loophole in the system in addition to the ones that already exist for remittances and equity stock investment, and raises potential money laundering risks. The immunity from routine audit hinders the self-assessment process, and the amnesty-entailed by waiving penalties and interests-is likely to be detrimental to improving compliance and collections as taxpayers will develop an expectation of future immunities".
Thus one may conclude that foreign currency accounts are a tax loophole as are remittances and equity stock investment and one wonders why the Fund refrained from itemising these accounts in the extract cited above. There is a need to shut down the tax loopholes instead of granting amnesties again and again that are simply ineffective.