Tax amnesty 2019: no place to hide?

Never mind PTI’s U-turn on tax amnesties; much has been written about it in this space. (See Tax amnesty: putting the cart before the horse, March 7, 2019). The relevant question now is: will the new amnesty work?

Mr. Asad Umar, the finance minister, of course justifies the new scheme. He says, ‘people now understand that old ways will not work in Naya Pakistan, but people still want at least one opportunity to wipe the slate clean, and we really don’t want to put people in jail’. This is based on the tenable notion that the system was so rigged in the last 70 years that some of the money became grey, not because of malintent but because of practical compulsions.

Granted! But will he also give some kind of tax relief to those who have been dutifully paying taxes for all these years? A relief for existing taxpayers is perhaps the only way a new tax amnesty cannot be construed as - what he once labelled - “a slap on tax payers’ face”. But never mind that too! When you ask such questions from big moneyed businessmen and stiff neck bureaucrats, they say “boy, you have not been schooled properly” – referring to the school that teaches how ‘practical realities trump morality in every game.

Back to the main question. Will the new amnesty work?

To begin with, academic literature is largely patchy; it does not provide a comprehensive list of ingredients to make a consistent recipe for a successful tax amnesty. And while there is no consensus on any single recipe for success, few features stand out from various case studies on tax amnesties.

The first relates to the nature of the scheme itself. Compared to the 2018 scheme, the proposed 2019 scheme is more comprehensive; for instance, it covers benami assets and undeclared sales/production in sales tax & FED.

There is also a condition to deposit cash declarations in own bank accounts (local currency or forex); repatriation of foreign assets is also mandatory. When it comes to bank accounts, credit entries of last five years have to be shown for valuation purposes, whereas the 2018 scheme sufficed with closing account balance. (For a bird eye view of comparison, read last week’s note by Tola Associates)

In other words, the proposed scheme is better structured than the last one, since it is asking for money to come into the system with more details being asked – such as bank credit entries of last five years. However, there are a few caveats.

For instance, for the purpose of valuation of plots and flats, the valuation is to be done at ‘cost or FBR rate, whichever is higher’. This will not bear full fruits of documentation. FBR’s rate are much lower than real market values, which necessitates that real estate valuation under amnesty should be done close to real market value, albeit, with lower applicable tax rate. The aim right now should be to document, and document at the right values.

This brings us to the second commonly observed factor of success: the element of surprise and secrecy. If tax evaders know well in advance about the details and the dates of amnesty period, they have more time to cook their books and assets accordingly. By now everyone and their aunties know about the details of the amnesty scheme, thanks to the pictures making rounds on WhatsApp groups. Don’t be surprised if FBR and Finance Ministry soon start facing a lot of influence from interest groups.

The third factor of success pertains to the duration of amnesty period. Academic literature suggests that amnesty period should neither be too short, such as 1-3 months; nor too long such as Bangladesh’s 2-year scheme in FY15. A good duration is about 8-9 months, as did Indonesia in 2016-2017, and collected north of $350 billion.

In contrast, the proposed 2019 scheme is expected to be formally announced by April 15, 2019 and ends at around June 2019. This is a short period if the government expects far bigger number of declarants than the last time (2018 total declarants: 82,889). Consider also, the likely operational hiccups at FBR, clearance by the judiciary, FATF/IMF, and of course political challenges.

The fourth factor of success of amnesty scheme is about nature of economic transition. Academic literature suggests that tax amnesties are successful if they come in tandem with economic transition towards ‘economic prosperity, technological progress, and changes in the business environment in general’. When people see that they are likely to be left out of the new economic order, they will hurry up to formalise themselves. The proposed 2019 scheme, however, precedes the economic transition that PTI promises.

The fifth factor relates to capacity of tax administration body. Amnesty without fixing FBR is putting the cart before the horse. At the launch of medium-term economic framework, Mr. Umar acknowledged that “the scheme will not be successful if people are not sure that the day scheme ends tax evaders won’t have a place to hide”. As a threat to those who may not avail the scheme, Mr. Umar highlighted the progress his government has made towards the implementation of benami law; better access to global financial and bank account information; and improving FBR’s capacity.

These are good steps; and threat is indeed a good motivator for people to swarm to amnesty counter. But one that will not necessarily work since at present, FBR only has the capacity to bark and not really bite professionally and expeditiously. Unless there are some used-cases of FBR’s strength – without arm-twisting tactics for collecting under-the-table money – FBR’s strength is only imagined rather than real.

Tax amnesties have better chance of success when tax body is already strong with its analytics, audit and other skills publicly displayed. Need one add that FBR’s user-friendliness and media/public perception have to be improved before the amnesty, and not simultaneously. On both these account, the proposed 2019 amnesty is jumping the gun.

Globally, in developed countries and developing, successful tax amnesties and asset repatriation schemes are an exception rather than a norm. Most often the success of amnesty is measured in terms of revenue yield; given Pakistan’s unique situation it ought to be measured in terms of the size of assets repatriated; close to market value documentation of assets; and the number of new filers brought into the system. On all these accounts, 2018 amnesty didn’t reap great fruits; neither will the proposed 2019 one, if the lacunas discussed above are not fixed, and if it’s not sequenced after economic transition and FBR reforms rather than before it.