Tax amnesty: Is PTI packaging gimmicks as economic reforms?

The real tragedy is that those in power in Pakistan do not seem to believe in evidence-based policymaking.

Updated 16 Nov, 2019 11:02am

Insanity, it is often said, is doing the same thing repeatedly and expecting different results. If this statement is true, then we can conclude that Pakistan’s ruling elite, irrespective of political affiliation, needs to change its course of action.

Almost 10 months in power, the Pakistan Tehreek-i-Insaf (PTI) seems to have run out of ideas on the economic front. A party whose leadership had promised new ideas and a structural revolution of the country’s political economy has approved a tax amnesty scheme, which is the proverbial last nail in Naya Pakistan's coffin.

Recently-appointed Adviser to the Prime Minister on Finance Dr Abdul Hafeez Shaikh announced the amnesty scheme on Tuesday.
Recently-appointed Adviser to the Prime Minister on Finance Dr Abdul Hafeez Shaikh announced the amnesty scheme on Tuesday.

The larger question, however, is whether these amnesty schemes really work. The answer to that, according to most research conducted around the world, is mostly no.

Let’s start with the concept of moral hazard, which says that, in general, there will be a lack of incentive to guard against risk where one is protected from its consequences.

Pitfalls

In simpler terms, it means that humans will take excessive risks when they know that someone will, at the end of the day, offer a way out without making them pay a significant price for the bail out.

This usually applies to industries that rely on state bailouts and was a topic of much discussion when the American government rescued big banks and the auto industry in the wake of the 2008 financial crisis.

Editorial: Documenting the economy

It also applies to Pakistan’s wealthy elites, who, after extracting wealth from the country and getting away with not paying their fair share of taxes, know that governments will sooner or later give them amnesty with minimal consequences.

The result is that citizens, particularly wealthier ones, are incentivised to evade taxes and take risks (in most societies, evading taxes is a criminal offence) and hide their wealth in precious metals, cash, real estate assets and offshore shell companies.

Evidence from abroad

This phenomenon is not unique to Pakistan and countries like India, Greece, Argentina, Russia and others have offered amnesty schemes to their citizens. Researchers and academics who have studied these schemes have concluded that this policy has, by and large, been ineffective.

Like Pakistan, India has offered several such schemes in the past, and while its government has a better track record at collecting taxes than us, its success with amnesty schemes is rather poor.

The Bharatiya Janata Party-led government announced an Income Declaration Scheme in 2016, which led to the disclosure of over INR650 billion (approximately $9-10 billion) of undisclosed assets.

The scheme resulted in over INR29 billion (approximately $400-450 million) in taxes for the government, representing 0.2pc of total tax receipts, which stood at $211 billion in the 2016-17 Indian budget.

This means that the taxes raised through this policy were paltry in the larger scheme of things, despite being a key goal of the Indian government

Russia has also tried its hand with amnesty schemes and a September 2009 paper written by academics from Georgia State University analysed its impacts following the collapse of the Soviet Union.

The researchers, after conducting a comprehensive analysis, concluded that “these amnesties had little demonstrable permanent impact on revenues” and that “the use of fiscal gimmicks such as amnesties imposes additional costs” and that “countries would be better off avoiding them”.

Related: What Pakistan can learn about tax reforms from developing countries

Argentina’s recent experience of it, however, is one of the rare success stories. The 2017 amnesty scheme brought the South American country over $116 billion of assets from offshore locations (far more than the $20 billion target), including Switzerland and the United States, and over $9 billion in revenues.

This made it the most successful such scheme in the world, allowing the Argentinian government, which was facing a financial crisis at the time, greater room to invest in the country’s economic development.

One reason for the scheme's success was that Argentinians not only had to pay a 10-15pc penalty and declare their assets, they also had to repatriate and invest them in government bonds for a period of three years at 0pc interest rate, or for a period of seven years at 1pc interest rate.

Secondly, Argentina engaged with international initiatives to transfer information and make it harder for citizens of the Organisation for Economic Cooperation and Development (OECD) countries to hide their wealth abroad.

A bilateral exchange of information agreement with the US was also signed, and these measures convinced Argentinians to repatriate their offshore assets back to the country.

Why Pakistan’s scheme might fail

This amnesty scheme is the fifth one offered to tax evaders since 2013, reinforcing the moral hazard problem.

Its broad contours are similar to the 2018 scheme announced by the outgoing Pakistan Muslim League-Nawaz government: the new scheme charges a 4pc penalty for cash that is declared and deposited in Pakistan’s banking system, while those who wish to keep their wealth abroad will be charged 6pc; the 2018 scheme allowed people to bring back foreign exchange by paying a 2pc penalty and declare foreign liquid assets like bonds by paying a 5pc penalty.

The 2018 scheme was able to raise almost Rs100 billion, which was about 2pc of the total tax revenue of Rs4.3 trillion expected in that year's budget. Over 55,000 individuals availed the opportunity to declare over Rs1,500 billion in assets, the highest amount declared under any amnesty scheme in Pakistan’s history.

However, there is no data available that suggests that tax compliance increased following this scheme, and one can safely say that incentives to evade taxes remained in place.

Explore: Why don’t we pay taxes?

Given that the PTI’s scheme has little new to offer, one can safely argue that its decision will not lead to any meaningful change in terms of taxpayers’ behaviour or the stated aim of increasing the size of Pakistan's documented economy.

This scheme also does not learn from international success stories, such as Argentina’s. There is no mandatory requirement to invest the newly-declared assets in government bonds. Pakistan did, however, sign the OECD Multilateral Convention last year to gain access to information about Pakistani residents' offshore accounts. But there needs to be more demonstrable evidence that the government is working with the OECD or countries like Switzerland and the United Kingdom on this matter.

In addition, the PTI government, like those in the past, has not fully explained the sticks it will use to go after individuals who refuse to declare their assets. Claims of using “data” and “automation” have been made in the past as well, and therefore should be treated as rhetoric.

What is also alarming is the lack of research that is conducted before such major decisions are made. After all, a country that has offered several amnesty schemes, should at least do studies and collect survey data to understand why people do not pay taxes, and assess best practices from around the world prior to devising policy.

The real tragedy here is that those in power in Pakistan do not seem to believe in evidence-based policymaking and learning from international case studies. The PTI, like its predecessors, is packaging gimmicks as real economic reforms.


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Uzair Younus is a non-resident senior fellow at the Atlantic Council in Washington DC.


The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (39) Closed

Adnan Latif
May 15, 2019 03:35pm
Nicely written article.
Recommend 0
ExMohajirinUK
May 15, 2019 04:21pm
Looks like Imran & Co. are optimistic about this amnesty scheme. Lets see how many billions will be deposited to govt. in this round of amnesty.
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imtiaz
May 15, 2019 04:31pm
Instead of giving amnesty black money holders should be given exemplary punishment.
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Habib A. Zuberi
May 15, 2019 04:58pm
Well, we know more things change, more they remain the same. This is what this fine paper tells us. I enjoyed reading it. One may consider Govt assessing the hidden value of assets outside the country and not paying taxes and impose the tax with a piece of cake the owner make keep, if it is turned over to government within thirty or sixty days, otherwise properties will bo confiscated to generate the full revenue. See what happens?
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Ash Man
May 15, 2019 05:12pm
All those who took pti promises at face value must be feeling let down. Not keeping election promises is one thing and doing the exact opposite is quite another.
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Patriot
May 15, 2019 05:18pm
Why do all these wise men in Pakistan, trained at some of the best universities in the world, keep on using failed formulas over and over again? Is their imagination limited? Can't they think something different?
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Tariq Shaheer
May 15, 2019 05:50pm
PTI's competencies are limited, ego is limitless, knowledge is superficial, rhetoric is weighty, nation wish that we had not won the world cup 92 as it is paying a heavy price now.
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Jamil Soomro, New York City
May 15, 2019 05:55pm
If Honesty Is The Best Policy then this realistic article will certainly be appreciated by the Readers of DAWN."The PTI,like its Predecessors,is packaging gimmicks as real Economic Reforms".Well said.
Recommend 0
Prateik
May 15, 2019 05:58pm
PTI amnesty scheme is old wine in the new bottle.
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Abbas
May 15, 2019 06:06pm
It Is our fault that we believe PTI was capable of something different. Never felt so wrong in life !
Recommend 0
Malik
May 15, 2019 07:08pm
If not amnest, what is the alternate solution for govt to collect taxes and increase transparency.
Recommend 0
fairplay
May 15, 2019 07:27pm
@Adnan Latif, the exact opposite, extremely poor.
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fairplay
May 15, 2019 07:28pm
@Ash Man , you mean like modis failed promises.
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Ranjha
May 15, 2019 07:40pm
Einstein, did you hear Hafeez Sheikh's presser? He knows it won't raise much assets. But it will bring some businesses and people permanently into the tax net ... the PV of all future taxes they will be compelled to pay is a much higher number! And also, the ones who do not avail the scheme will have no excuse left....Imran Khan through a revamped FBR will come after them with bare knuckles! Just watch!!!
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Aasghar
May 15, 2019 07:45pm
They are trying to pull the wool over everyone's eyes! Useless administration!
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SHAHID SATTAR
May 15, 2019 08:06pm
Hollow worthless promises are all this current government made to the people in general. Time has shown that they have been unable to keep the commitments made to the masses and lack the capability to govern smoothly.
Recommend 0
Sameer
May 15, 2019 08:16pm
Imran Khan chanted there will be no NRO, Tax amnesty scheme IS NRO.
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MK
May 15, 2019 08:33pm
The thing is, we can write what ever we want. From out side every one can say oh this is wrong, that is wrong. Pakistan is so destabilized from inside economically that it will look like any changes or implementation are impossible. Thing is one has to go inside and than make comments or do something. Yes IK indeed said a lot of things in the past which he truly meant to do but when he got on the seat than he realized this will take a while to make changes. Come on people we have to be honest to our selves.
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Sara
May 15, 2019 08:35pm
A beautifully expressed article and very true . I do hope we wake up before it's too late .
Recommend 0
N Abidi
May 15, 2019 09:03pm
Pakistan has a black,or informal economy , in this reality , out of box thinking is needed, this time the top guys.are not in it for themselves ,to white washed their own money, so ,great chance for the bussinesses to come out of the dark shadows, into a bright light,Pakistan will be helped ,thus, the economy , blessing in Ramzan ! Gimmicks ,what is called Darr 's Pakistan 's economics plan!
Recommend 0
Abdullah
May 15, 2019 09:18pm
Nothing " Naya" in Naya Pakistan.
Recommend 0
Kanakasabhai
May 15, 2019 09:20pm
Argentina virtually follows US $ as currency and for decades people have been allowed dollar accounts. With no question asked conversion into dollars people made use of Amnesty scheme but after 2017 have reverted back to US $ that has made the country an economic mess. iMF loan of $ 55 billion hasn't helped the country a bit with sky high bank rate and inflation. It is in a terrible position with all shop keepers adjusting prices for that days dollar rate. For other countries amnesty schemes are just an extra. Pakistan has to learn from Argentina one of the richest countries in the past as it goes to IMF often.
Recommend 0
Daniel
May 15, 2019 09:39pm
@Tariq Shaheer, loved your comment
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Gen Akbar ret.
May 15, 2019 10:10pm
The sad fact is that Imran fired one of the most accomplished macro economists in the world - Atif Mian. This was done solely to please the mullahs . How can PTI be successful if this is their strategy?
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Abid
May 15, 2019 10:23pm
Very well written. We have to understand that tax amnesty isn't the only answer. Pakistan's economy needs structural reforms and evidence based policy making.
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Jamshed
May 15, 2019 11:53pm
Why tax evaders pay one time only 4 to 6% and wash their crime, where as the salaried people year after year honestly paid the applicable taxes. This is injustice and is done for benefit of business community and politicians who are crooks.
Recommend 0
brr
May 16, 2019 12:10am
Gimmicks dont really work, nothing Naya about gimmicks
Recommend 0
Qamar
May 16, 2019 12:44am
Until and unless imran Khan as claimed, doesn't truly apply the system of Madina. He is a failure nor cut but abandon lavish life style of all govt machinery. You will see the results. Ehtesab of all. No sifarish no back door this is the only way to achieve the economic target
Recommend 0
Jinnah
May 16, 2019 01:01am
The only way for an amnesty scheme to succeed is to make into law no further amnesty schemes will be offered or allowed to be offered by any successive administrations and strict implementation of law with financial and mandatory prison sentences.
Recommend 0
Sadaqat Ranjha
May 16, 2019 02:12am
Well organised and informatics article. It seems that PTI Govt. is doing all the things in hurry. No ground working, even not applied any successful case study just opened the door for fewer elite thieves. It must be conclusive and should be launched after getting all the record of non tax payers etc.
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Zak
May 16, 2019 03:26am
Give PTI its 5 years and see the change. Dont attack at every corner.
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Hashim
May 16, 2019 03:59am
The writer has made a very valid point that the government is just focusing on undeclared assets and money stashed abroad. They are not making any effort to increase the tax base in Pakistan. It is absolutely astonishing that out of the total workforce in Pakistan, only about 1.3 million are registered as tax payers. The government should be making an effort to increase this number to about 2 million in their remaining 4 years.
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Millake
May 16, 2019 06:49am
Crime pays in the land of the pure.
Recommend 0
Omar
May 16, 2019 07:59am
Excellent article!
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haider shaikh
May 16, 2019 01:54pm
PTI's hybrid government, led by politicians and professionals, would ensure "the amnesty gimmick" turns into a game changer unlike the previous political governments.
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Nic NY
May 16, 2019 02:31pm
The problem is that IK lacks a credible and professional team who could deliver goods!
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Moltke
May 17, 2019 08:23pm
It is a universal fact that without a stout stick, any attempt at offering carrots to economic offenders is a futile exercise. Apart from legal means of securing data with other countries, Pakistan or any other country for that matter could engage professionals who could forcefully extract financial data from tax havens. The money they have in these havens is our money & we are well within our rights, especially if the other party is uncooperative, to resort to forceful means. Wiki leaks is one excellent way to do it. You need the data & a 'selected' JIT to get the rich to cough up the cash they owe to the sovereign. Amnesty schemes are a sham aimed at deception & those that do it must be punished severely.
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haq nawaz khan
May 18, 2019 08:44am
there are a lot of investors in Pakistan , i think we can get tax very easily if we give this contract to private firms and give them a task to obtain tax and get their commission , govt institutions are not working thats why they are falling day by day , i think private sector can get and arrange a large number of tax , govt should focus on this , we all our country , Pakistan zinda bad
Recommend 0
Ghazi
May 18, 2019 01:03pm
I said it before and will say again...I.K is an activist (all talk), not a leader or understands how to run a country?
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