The much talked-about tax amnesty scheme has been finally launched by prime minister Shahid Khaqan Abbasi through a live televised press conference; it is part of a tax policy package that seeks to enlarge the tax base, address the problem of tax evaded assets within the economy and stashed abroad rather than a one-time measure to generate revenue as used to be the focus of previous amnesties that successive governments have announced with remarkable consistency. It is also a fact that despite such a glut of tax amnesties, the country still boasts one of the lowest tax-to-GDP ratio in the region, a predominant reliance on indirect taxation because of the appallingly low number of income tax return filers that hovers around 1.2 million (of which only 750,000 pay tax) in a population of well over 200 million people. Not only that, whatever is collected as income tax, over seventy percent of it is collected through 'Tax Withholding'; a cumbersome and elaborate maze of varying rates on different types of transactions for different juridical persons that is invariably passed on in the sale price like an indirect tax and is a compliance nightmare for a small or even a mid-level business. This has resulted in creation and expansion of the informal sector within the country that is almost at par in size with the formal or documented sector now.
Drawing a lesson from the fact that previous tax amnesties did not result in enlarging the documented sector, Abbasi announced measures with a view to addressing this problem. Tax rates on individuals have been slashed substantially and all those that avail the amnesty scheme shall be enrolled as taxpayers as the declared focus is on broadening the tax base instead of a quick one-time increase in revenue. There is complete unanimity of view within the country that real estate is the sector of choice for parking tax evaded funds and that there is a complete mismatch between the declared and actual transaction values of almost all real estate transactions. The proposed package seeks to address this malaise and instead of prescribing area-wise values to real estate, as is the practice currently, it astutely leaves it to the discretion of the parties involved in the transaction, to declare whatever worth they ascribe to their asset with the caveat that the state would have the option to acquire at twice their declared value. The option for the state to acquire the property at a higher price than the declared value is a concept that has been in vogue in India for quite some time. However, for this measure to be implemented the provincial governments will have to be on board as registration of property transactions and stamp duty paid on such transactions constitute their exclusive domain.
Since publication of the Panama and Paradise Papers, offshore assets of Pakistanis have been in the limelight. Estimates with regard to value of such assets abroad abound. Figures of $ 150 to $ 200 billion have been quoted. While there is no empirical evidence to support such estimates, but the fact is, that law in Pakistan, since the advent of the 'Foreign Exchange Bearer Certificates' introduced through the finance bill in 1985 by the then finance minister, the erstwhile, Dr Mahbubul Haq, followed by the 'Protection of Economic Reforms Act 1992' enacted during the first term of former prime minister, Nawaz Sharif and, 'Foreign Currency Accounts (Protection) Ordinance 2001' introduced by the then finance minister, Shaukat Aziz, progressively facilitated the transfer of funds (whether tax evaded or otherwise) to offshore destinations. The Supreme Court too has taken suo motu notice of this matter and constituted a committee comprising among others, the governor of State Bank of Pakistan, and announced their terms of reference to suggest ways without creating economic upheaval to retrieve these assets from abroad. The report of this committee is awaited. Although, it would have been better for the government to wait for the apex court's view/order/directive, if any, but perhaps due to paucity of time, the government has announced a scheme for declaration of assets held offshore and different rates of tax to be paid to qualify for amnesty from prosecution. The results of similar amnesties launched by India, Indonesia and Malaysia recently seem to have been kept in view while formulating the tax rates for legitimizing such assets and allowing retention of such assets abroad by the people declaring these assets should they wish to.
There is a general perception that is being emphasized by a section of people that oppose the grant of amnesty on offshore assets in particular. It is argued that the OECD convention, of which Pakistan is a signatory along with over 100 other countries, has made it extremely difficult and risky for resident citizens to hold such assets abroad. This may be so for liquid assets such as bank accounts and bonds but the OECD convention does not cover fixed assets/real estates that constitute bulk of the offshore investment in terms of value because interest rates are very low in countries where these assets are stashed. Therefore, reliance on the OECD convention precipitating declaration/repatriation of such assets is misplaced as regards fixed assets and, this is where the package announced by the prime minister, in our view, needs an amendment. It has been proposed in the package that the fixed assets will be taxed on the market value which shall not be less than the acquisition value. We feel this will make the declaration of fixed assets a non-starter as it would serve as an inhibitor because the present market value may have no relationship with the acquisition value in cases where acquisition took place quite some time ago or if the property in the hands of a present owner was transferred by way of a gift or inheritance or a settlement of family assets. In our view, it should be on the acquisition value for which proper legal documentation should be provided upon declaration. Likewise, declaration of liquid assets whether repatriated or not should be supported by a bank statement for the last one year or date of account opening, whichever is later.
According to the prime minister, an ordinance will be issued anytime soon to give legal cover to this scheme. The Pakistan People's Party (PPP) and Pakistan Tehreek-e-Insaf (PTI) have announced their opposition to this scheme, arguing, among other things, that the incumbent government should not have taken such a major fiscal decision at the fag end of its 5-year tenure. Although, it is not known whether or not an opposition-led parliamentary uproar will ultimately block the passage of this proposed legislation, a direction from the apex court, which is already seized of this issue, will certainly clear the air insofar as the future of this 'economic reforms package' is concerned.