LAST Thursday, a mere two months before the expiration of this government’s tenure, the prime minister announced a wide-ranging set of tax reforms. These are expected to kick in from the next fiscal year, after the federal budget is approved sometime later this month.
There are three main components of this reform effort. The first is a simplification of income tax through the notification of just three tax slabs, five, 10 and 15 per cent. This has been accompanied by a trebling of the minimum taxable earning from Rs 400,000 to Rs1.2 million per year. A quick back-of-the-envelope assessment shows that at least 90pc of Pakistanis are now exempt from income tax, based on the current distribution of household income.
The second component of this reform involves the declaration and repatriation of foreign exchange at the rate of 2pc of total value, and declaration and repatriation of foreign fixed assets at 3pc of total value. The intention of offering this amnesty is both to raise revenue, as well as mobilise foreign capital held by Pakistanis for more productive use in the domestic economy.
The thinking and rationale behind the newest scheme, and the evidence base on which it stands, need to be interrogated more thoroughly.
Finally, the third — and least discussed — component is the declaration of unrecorded incomes earned on domestic assets (primarily real estate), which can now be documented at a payment of 5pc. Built alongside this is a proposed punitive measure, which would allow the federal government to seize properties at a price determined by a factor of their declared market price. The theory here is that it would incentivise people to declare their properties at the rate at which they were purchased.
States, both in the modern era and during antiquity, have generally carried out two interrelated tasks: waging war and collecting taxes. These two tasks are said to be at the core of ‘state-making’, ie the process through which a bureaucratic, sovereign entity develops a monopoly of control over a given territory.
This latest attempt at tax reform is the Pakistani state attempting to carry out one of its primary tasks. Through much of its 70 years of existence, this is a task the state has been pretty terrible at, as encapsulated by its narrow tax base, its reliance on indirect earnings, and its consistently low tax-to-GDP ratio.
Recent gains in increasing revenue notwithstanding, the general ineffectiveness of the state machinery in rationalising the country’s taxation regime leads to poignant questions about the nature of this latest reform effort.
As covered on these pages last week, this is the third amnesty scheme developed by this government. None of these have amounted to much, either by way of raising tax revenue, or expanding the documentation of the economy. Furthermore, given a history of arbitrary exemptions through statutory regulatory orders, and a history of general corruption and rent allocations in economic policymaking, there is widespread scepticism about any such step that the government takes.
The end result is that even though — on the surface — the government is undertaking one of its core functions, it remains the target of both justified and exaggerated criticisms across a variety of angles.
The loudest, simplistic, and most commonly preferred angle — used by sections of the media and the political opposition — is that the amnesty schemes are a political ploy that favour either Nawaz Sharif, or a small cabal of corrupt individuals who have stashed their wealth abroad. The line of critique is correct only in so far that any fiscal manoeuvre by the government is intrinsically political. There are winners and losers in any such decision, and one can argue that an amnesty retroactively penalises the few who have been declaring their incomes and paying their taxes in full. Similarly, the tax relief provided to those earning less than Rs100,000 per month might result in some political goodwill being accumulated in the shape of votes.
However, to suggest that nefarious designs are the primary motivation behind such an expansive effort is just plain stupidity. Amnesty schemes have been deployed in a wide range of country contexts, and some have achieved good results. A major, if not the biggest reason, for their roll-out has always been increased tax revenue and the transfer and mobilisation of capital in the formal economy for more productive purposes.
Therefore, a more nuanced line of critique for Pakistan’s case should be what makes this particular scheme different given the failure of previous ones, how will it protect itself from misuse, and how will it actually see through the promises it makes, especially with regard to immunity from future prosecution for those who avail it. In short, the thinking and rationale behind the scheme, and the evidence base on which it stands, need to be interrogated more thoroughly.
Which brings me to the last point concerning the government’s interface with the public on such policy endeavours. Rumours of this scheme had been circulating for quite some time. There was also some debate in parliament on how to bring back undeclared foreign assets. But the eventual announcement came as a stand-alone news conference by the prime minister. A few questions were answered during its course, and that was the end of it. The entire exercise, and its timing right at the end of a five-year term, make it appear far more abrupt and thus far more nefarious — than it probably is.
On this front, the government has a lot of homework still to do. Dealing with an uninformed media and a reactionary opposition is an unenvious task, but it is crucial nonetheless. As with any policy move, there needs to be a concerted attempt to explain why this is a good idea and why this is being done now. Without a good, publicly digestible sell, this and the next government will find it hard to see through any contentious reform successfully.
Published in Dawn, April 9th, 2018