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Checkmate?

April 09, 2018

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The tax reforms package seems to be the last major act of the government to attract urban middle-class voters and woo back support of a largely estranged wealthy business elite just ahead of the next elections.

The reforms include massive personal income tax cuts of around Rs105 billion and a scheme to legalise undeclared domestic and offshore assets.

The announcement of such a controversial package close to the elections, notes a Lahore-based political economist who does not want to give his name for personal reasons, has raised questions about the intentions of the ruling Pakistan Muslim League-Nawaz.

“… The government is facing serious challenges from the security establishment and the judiciary, as well as its political opponents. So it’s trying to target, at the state’s expense, middle-class voters and business people, especially the angry textile lobby from Punjab, who are not happy with the current economic policies.”

“The tax reforms are clearly an attempt to influence voters … many who were thinking of voting for us or other parties may now vote in favour of the ruling party,” says a PTI leader

The income tax cuts are projected by some analysts to benefit 4-5 million urban households across the country, putting additional disposable income in their pocket from next year.

The increase in the income tax exemption threshold by three-fold, from Rs0.4m to Rs1.2m, and cutting the maximum individual income tax rate by 57 per cent (from 35pc to 15pc) from the upcoming financial year is going to please tens of thousands of salaried individuals. It will also push small businessmen out of the tax net, a financial analyst working for a brokerage house in Karachi points out.

“The government thinks that it can prop up the PML-N’s chances in the cities in the next elections and somewhat refurbish the public image of the ruling party and its ‘supreme’ leader Nawaz Sharif. An image severely damaged by his disqualification by the Supreme Court and ongoing corruption inquiries against him and his children.”

Miftah Ismail, the prime minister’s advisor on finance, revenue and economic affairs, says the country’s tax income will double by the end of this fiscal year (to around Rs4 trillion) from Rs1.9tr in FY2012-2013, allowing the government to (drastically) reduce the tax rates in line with Mr Nawaz Sharif’s vision and the party manifesto.

Opposition parties fear that the middle-class voters in Punjab could react ‘positively’ to the tax breaks for the salaried classes and smaller businessmen.

“This is clearly an attempt to influence voters. Take the example of several hundred thousand voters whose income (below Rs1.2m a year) is now tax-free. Who would they prefer to elect?

“Not all of them will vote for the PML-N, but many who were thinking of voting for us or other parties may now vote in favour of the ruling party,” says a Pakistan Tehreek-i-Insaf leader on condition of anonymity.

He says he is not aware if his party’s plans to challenge the scheme. “We are kind of caught between a rock and a hard place. Challenging the tax cuts or the amnesty package can prove counterproductive for our party. It could cost us a significantly large number of middle-class votes on polling day.”

The government’s political motives apart, many believe that the package has several economic benefits. The reduced taxes and resultant increase in disposable income, for example, should push consumer spending and possibly improve savings.

The amnesty on concealed wealth is projected by some businessmen and analysts to help bring back undeclared offshore assets and cash of between $2bn and $5bn during the three-month window made available.

Ali Asghar Poonawala, an analyst at AKD Securities, argues that legal hurdles and political challenges aside, the one-time foreign asset amnesty scheme aims to repatriate foreign assets at a minimal rate where only substantial, undeclared wealth owners seem to be the target benefactors.

“In the backdrop of a transnational push for declared sources of income and breakdown of banking secrecy, counter-terrorist financing, this could be a way out for many of Pakistani origin to repatriate funds back home bearing only a small levy, formalising their wealth and avoiding criminal liabilities.”

Khurram Mukhtar, a leading textile exporter from Faisalabad, agrees. “This is a huge opportunity for those who have stashed illegal money outside of Pakistan as the world plans, after 2019, to tighten the noose around the people who have stashed illegal wealth anywhere.”

Additionally, owing to the changes in the tax and valuation system governing real estate transactions, the property market is likely to become more transparent. More money may also start to flow into documented sectors with the decision to use CNIC numbers in place of NTN numbers pushing the number of taxpayers in the country.

Published in Dawn, The Business and Finance Weekly, April 9th, 2018