Amid domestic political pressure, Prime Minister Imran Khan moved boldly to reverse some of the key ‘prior actions’ he had taken only a few weeks ago for reviving the $6 billion programme of the International Monetary Fund (IMF) that was put on hold in April 2020 for the lack of committed reforms.

Soon after his landmark visit to Russia amid international hostilities, the prime minister announced the Rs237bn subsidy package committing Rs10 per litre cut in petroleum prices and Rs5 per unit reduction in electricity rates along with a 4-month freeze in rates until end-June 2022 despite rising global oil prices. The icing on the cake came in the shape of yet another amnesty scheme for industrialists to whiten the black money, the third one in as many years of PTI rule.

Prime Minister Khan and his party had been staunch opponents of the amnesty schemes while in opposition. The introduction of another amnesty scheme in mini budget-two in March goes against the stated policy of withdrawal of tax exemptions in mini budget-one in December for the removal of distortions in the revenue system.

These three steps are 180-degree opposed to prior actions committed with the IMF in December 2021, leading to the revival of the programme and disbursement of $1bn in February 2022. Under the ‘prior actions’, the government had to withdraw Rs350bn worth of sales tax exemptions, approve a monthly increase in petroleum levy, increase electricity rates and cut the development programme by Rs200bn, making the combined impact at more than Rs550bn of the mini-budget announced in the last week of December.

The fact that the government had to come up with two mini-budgets within a fiscal year brings the sanctity of the budget into question and the reversal of key measures within two months blemishes its economic management abilities

Finance Minister Shaukat Tarin had assured the IMF that federal tax revenue would grow by more than 25pc, buttressed by durable fiscal reforms and tax administration efforts. “It will also be supported by higher environmental taxation by ensuring the petroleum development levy (PDL) on gasoline and diesel. We will raise the PDL (prior action) by Rs8/litre and we commit to raising the PDL by Rs4/litre per month for the remainder of 2021-22 until the maximum of PRs30/litre is achieved”.

Very clearly, he had also “reaffirm(ed) the commitment to not granting further tax amnesties and avoiding the practice of issuing new preferential tax treatments or exemptions”.

In fact, the government had promised “to review by end-June 2022 the implementation of AML/CFT [Anti-Money Laundering and Counter Financing of Terrorism]controls by financial institutions with respect to the tax amnesty programme for the construction sector”. Finance Minister Shaukat Tarin and Governor State Bank of Pakistan (SBP) Dr Reza Baqir had given a signed commitment to the IMF that “the SBP will conduct by end-June 2022 a thematic inspection of banks’ compliance with AML/CFT obligations — such as customer due diligence, record keeping and suspicious transaction reporting — on funds received under the programme through the designated bank accounts including a random sampling of beneficiaries”.

In addition, they agreed that by the end of September 2022, the key findings and recommendations of the thematic inspection will be shared with the banking sector through the compliance forum and relevant competent authorities through the General Committee under AML Act, and appropriate enforcement actions will be undertaken including changes in the regulatory framework, as appropriate.

These are confusing and contradictory policy signals. The fact that the government had to come up with two mini-budgets within eight months of the fiscal year raises question marks on the sanctity of the budget and reversal of key measures within a gap of two months blemishes financial and economic management abilities.

The new amnesty scheme is seen as a departing gift to wealthy individuals and companies who may be playing a key role in the financing of the next elections. This is based on the premise that tax incentives had been provided to the industrial sector through Special Economic Zones, Export Processing Zones and Special Technology Zones and there was a need to extend it to other geographic zones to create employment, revive sick industrial units and encourage “entrepreneurs to invest in industrial undertakings out of their undisclosed assets” besides the non-resident Pakistanis and resident Pakistani individuals to repatriate their foreign exchange into Pakistan and invest in the industry.

Under the scheme, instead of about 49pc tax, including 24pc tax rate and 29pc penalty, a 5pc across-the-board tax rate will immune the investor from probe about his sources of investment as provided under the Income Tax Ordinance, 2001. The investor will establish a new industrial unit through the creation of a new company. Similarly, existing units can avail the facility for balancing and modernisation. The cutoff date for filing such declarations will be December 31, 2022, with the condition to start commercial production by June 30, 2024.

Secondly, in case of revival of sick units, the companies returning a net loss in the last three years will be eligible to be acquired through acquisition (not amalgamation) by a healthy profit-making company, which will be incentivised to adjust the sick company’s tax losses for the next three years.

Thirdly, in case of tax incentives for foreign investment, the amnesty provides that if eligible non-resident Pakistanis and resident Pakistani individuals repatriate their declared foreign assets into Pakistan for investment into industry, they would be entitled to 100 per cent tax credit for the next five years.

The government was in such a hurry that it promulgated the ordinance to implement the amnesty scheme instead of getting it passed from the parliament. Also, the cabinet approval was achieved through the circulation of a summary instead of a cabinet meeting. The prime minister also dispensed with the mandatory condition of submission of summary to the Cabinet Committee for Disposal of Legislative Cases (CCLC) and approved submission of the summary directly to the Cabinet through circulation.

With a retrospective effect, the ordinance also blocked investigation agencies like the National Accountability Bureau and Federal Investigation Agency to ask for information about investments and tax exemptions secured in all tax amnesty schemes including three announced by PML-N and three by the PTI. It also barred disclosure of information under the right to information law and at the same time protected top tax officials who had earlier disclosed personal tax details of a senior apex court judge.

The said provision said: “Notwithstanding anything contained in the Qanun-e-Shahadat, 1984, the National Accountability Ordinance, 1999, the Federal Investigation Agency Act, 1974 and the Right of Access to Information Act, 2017, or any other law for the time being in force, no court or other authority shall, save as provided in this Ordinance, require any public servant to produce before it any return, accounts, or documents contained in, or forming a part of the records relating to any proceedings under this Ordinance, or declarations made under section 100F of this Ordinance or made under the Voluntary Declaration of Domestic Assets Act, 2018, the Foreign Assets (Declaration and Repatriation) Act, 2018 or the Assets Declaration Act, 2019 or any records of the Income Tax Department generally, or any part thereof, or to give evidence before it in respect thereof.”

Published in Dawn, The Business and Finance Weekly, March 7th, 2022

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