The periodic bouts of tax amnesty have brought paltry sums of revenue to the national exchequer while legalising untaxed money. By incentivising tax evasion, amnesty schemes have discouraged documentation and tax compliance.
These amnesty schemes penalise honest taxpayers while tax authorities prefer shortcuts, ignoring their adverse impact on tax culture.
Will the latest move by the incumbent government to offer amnesty to individuals — who have parked their assets offshore and onshore — be beneficial in the absence of needed reforms within the Federal Board of Revenue? Or will this further encourage tax evasion and avoidance? Past performance does not offer much hope.
Tax evaders declared an amount of Rs1.12bn in 1958, Rs920m in 1968, and Rs1.5bn in 1976. Special tax exemption schemes were announced in 1985, 1991 and 1998, but no official record with the FBR is available on the outcome of these schemes.
In the year 2000, a tax amnesty scheme resulted in the recovery of Rs10bn on declaration of movable and immovable assets. The same scheme was offered in 2008, which raised Rs3.16bn.
In 2012, amnesty was offered to stock exchange investors, followed by another scheme for industrialists in November 2013, to whiten black money by investing in specified sectors. The record on the outcome of these two schemes is not available with the FBR.
These measures are announced with a clear understanding that no such amnesty will be announced in the future, yet it is, again and again.
Will the latest move by the incumbent government to offer amnesty to individuals be beneficial in the absence of needed reforms within the Federal Board of Revenue?
The much-hyped tax amnesty scheme announced in February 2016, aimed at documenting informal retail, has been rolled back due to a lukewarm response from the trader community. Only 9,020 traders opted for the scheme and contributed a meagre Rs850m.
The latest amnesty announced was for the realty sector in November 2016.
Tax experts say that despite previous money whitening schemes, Pakistan continues to face low revenue generation, a ballooning debt burden and increasing revenue leakages.
Special Assistant to the Prime Minister, Haroon Akhtar Khan, believes that the failure of past amnesties was due to the fear among people that officials will harass them once they are in the tax net. But, he said, the current amnesty move was to bring back the capital parked outside the country.
Mr Khan says “We will look into every aspect of the new scheme”, adding that the new amnesty is mainly driven by a new global anti-tax evasion scheme made operational under a multilateral tax convention, or bilateral arrangements, on the avoidance of double taxation.
Over 104 members of the OECD will automatically begin to exchange records this year, as part of a coordinated global crackdown to expose tax evaders. The government will receive information regarding Pakistanis holding funds abroad and will begin to exchange similar information with other countries whose citizens hold bank accounts in Pakistan from July 2018.
Despite this global deterrence, a powerful lobby within the government still supports a lenient amnesty scheme that will allow those with large holdings abroad to declare and repatriate their wealth while facing minimum penalties. Supporters believe that a higher penalty may not encourage people to bring back money.
They argue that funds held abroad are the easiest way to get a foreign citizenship and skip Pakistani income tax law.
Contrarily, some tax experts are not in favour of blanket exemptions. According to Dr Ikramul Haq there is no practice in the world that gives a blanket exemption to tax dodgers. The US not only recovered due taxes from those citizens who kept their money in Swiss banks, but also collected s 50pc penalty. While later the US government waived off the 50pc penalty, it did not compromise on the original tax amount.
In its report submitted to the FBR, the Tax Reforms Commission termed tax amnesty as an incentive for dishonesty. “All tax amnesty schemes should be done away with as these encourage tax evasion and illegitimate tax avoidance”, the report suggested.
However, there is a permanent window for money whitening under section 111 (4) of the income tax ordinance. There are also reports regarding black money being rerouted through remittances to whiten it through a nominal fee. Finance Minister Ishaq Dar has recently disclosed that $7.6bn alone has been transferred to Dubai since 2001 through banking channels.
In the presence of these permanent windows, tax analysts believe there is no logic of giving a special amnesty scheme.
But tax officials also say the proposed scheme will be different from the past. India and Indonesia have offered similar schemes recently. India raised $6.6bn in revenue while Indonesia raised $7.6bn. Pakistani officials hope to get a similar amount in taxes from foreign asset declaration.
But tax expert say such a thing is only possible if the government comes up with a safety net for the tax system.
They proposed that the concept of ‘year of discovery’ in income tax should be revived and the tax statutory period of five years for probing past cases be abolished.
It is also recommended that the penalty of non-disclosure after this scheme be 300pc along with five-year imprisonment. Outflows from the country should be capped or at least disclosure of source be made mandatory.
Until deterrence is improved, not many will come under the tax net as evident from the current poor tax compliance. The tax compliance fell to 21.32pc in tax year 2016 from as high as 65pc in 2010-11.
Published in Dawn, Business & Finance weekly, January 16th, 2017