PEOPLE have already started availing parts of the tax amnesty scheme, officials of the Federal Board of Revenue (FBR) say; attributing a 17 per cent growth in April’s tax revenue partly to an early response from beneficiaries.

Under the amnesty scheme, undeclared income earned before 30th June 2017 and held as local assets (gold, bonds, property etc.) can be regularised on payment of five per cent of the asset’s value.

Tax officials say, and bankers confirm, that inflow of tax money into bank accounts is picking up pace as awareness about the benefits of availing the scheme is growing.

“From a banking point of view, greater documentation of the economy via the tax amnesty scheme or some other budgetary measures is important,” says the head of a large local bank. “Banks find it easier, and in many cases it’s mandatory on them, to lend to businesses and individuals whose tax records are well documented. So, when people and businesses come under the tax net, the sector gets better lending opportunities.”

The temporary slump in real estate prices in the wake of the tax amnesty scheme will soon be over, bankers say adding that gradual regularisation of property holders’ tax records will eventually help them reach out to a larger section of housing finance seekers. Besides, this would lead people and businesses to use newly declared properties as collateral for business loans from banks and other financial institutions.

Tax officials say, and bankers confirm, that the inflow of tax money into bank accounts is picking up pace as awareness about the benefits of availing the scheme is growing

Declaration of other assets like gold and bonds will also enable those availing the amnesty to pledge the same as collateral for additional bank borrowings.

Owners of undeclared physical assets employ these assets as collateral for bank loans only selectively because they have to establish credit worthiness of their front-men in whose names these assets are held.

Mid-tier bankers responsible for appraisal of credit proposals say they routinely reject proposals that offer collateral of physical assets belonging to people who are not directly related with the borrowing entities. It’s a separate story, though, that influential borrowers manage to get some such proposals approved.

Some senior bankers say the impact of the tax amnesty scheme on banks’ lending will become clear with time but its effect on deposits will be visible in the short term.

“When people avail the scheme and pay lump sum taxes in huge amounts to the FBR, it results in an immediate building-up of government deposits with banks,” says a senior executive of a local bank.

But wouldn’t this be a simple movement of money from one category of bank account to another?

“Certainly, that would be the case if those availing the scheme use the money currently held in their bank deposits to pay the taxes they are supposed to under the provisions of the scheme.

“However, in times of tax amnesties people often feed their bank accounts with their cash holdings so that it becomes more than just a movement of money from private sector deposits to government deposits, showing a real build-up in total bank deposits.”

If the present tax amnesty scheme, the fourth one introduced by the PML - N government, lures a significant number of people to benefit from it, “we can see an emerging culture of documentation of the economy and a consequent squeeze in growth of the informal economy and grey banking,” says a senior executive of the state-run National Bank of Pakistan.

All depends on whether the deadline for availing the amnesty scheme is extended beyond June 30, 2018 through re-promulgation of the ordinance during the caretaker government. Bankers say in the backdrop of the current judicial activism, people tend to believe that the scheme might be extended. That’s perhaps why they are participating as the FBR claims, they say.

In terms of its impact on the banking sector, perhaps more significant than tax amnesty scheme, is a single budgetary measure aimed at documentation of the economy, some bankers say referring to the introduction of nominal taxes on annual incomes exceeding Rs0.4 million.

Finance Minister Miftah Ismail announced in the budget that the minimum taxable income has been increased from Rs0.4m to Rs1.2m. But the Finance Bill 2018 made it clear that whereas annual income up to Rs0.4m will continue to remain tax-exempted, a nominal tax of Rs1000 will be charged on annual income higher than Rs0.4m and up to Rs0.8m; while a tax of Rs2000 will apply on income higher than Rs0.8m and up to Rs1.2m.

This is a sure way of bringing more people into the tax net and will lead to immediate increase in the number of taxpayers. For banks, it opens up greater opportunities for consumer and personal loans.

Other similar measures announced in the budget, like the ones restricting non-filers from purchasing property worth more than Rs4m and making automobile buying more difficult for them, would also help banks to reach out to new consumer finance seekers, senior bankers say.

If the local wealth declaration part of the tax amnesty scheme becomes a success the resultant increase in the size of the formal economy should be helpful for sound banking in many more ways.

“For example, the deposit mix will witness a positive impact in terms of local currency and foreign currency deposits,” points out the head of treasury operations of one of the top five banks. “Within forex deposits, too, the impact of tax amnesty (on both local as well as foreign asset holding) can change the holdings of resident and non-resident holders.”

As of March 2018, total foreign currency deposits with banks stood at $7.5 billion or a little less than 7pc of the total deposits of the banking system. And out of $7.5bn, below half a billion dollars were owned by non-residents.

Bankers hope that as local and foreign wealth declaration under the amnesty scheme gathers pace, foreign currency deposits as percentage of overall deposits of the banking system will either shrink or remain at current levels, safe and cannot be regarded as a pointer to dollarisation of the economy.

More importantly, they believe that within the total foreign currency deposits the share of resident holdings, too, may decline or remain more or less intact—thanks to restrictions placed on feeding foreign currency accounts locally.

That can potentially reduce chances of whitening of black money and capital flight, help in maintaining forex liquidity in interbank market and prevent any speculative attack on exchange rates.

Published in Dawn, The Business and Finance Weekly, May 14th, 2018