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Pessimism about Pakistan's tax amnesty

November 15, 2012

— File Photo

ISLAMABAD: Pakistan is banking on a new amnesty to bring millions of tax evaders into the revenue net but analysts warn the scheme is a charter for cheats that will encourage money laundering.

The country's new tax chief Ali Arshad Hakeem faces a formidable task as he tries to persuade millions of people to break the habit of a lifetime and cough up part of their income to the exchequer.

The country has one of the least effective fiscal regimes in the world — from a population of around 180 million, only 260,000 people have paid tax consecutively for the last three years.

Total tax revenue amounted to a paltry 9.1 per cent of GDP last year, among the lowest in the world.

Hakeem, the new chairman of the Federal Board of Revenues (FBR), the country's main revenue collection authority, is hoping to lure up to three million non-payers with a special offer, though he conceded it was a “gigantic task”.

For a one-off flat payment of 40,000 Pakistani rupees — just shy of $420 — even lifelong tax evaders will have the slate wiped clean, in return for committing to pay tax regularly from next year.

“We will issue notices to evaders after approval of the proposed law and it will not be very difficult to hit them as we have full data available about them, whether they are politicians, businessmen, cricketers or showbiz people,” he said.

Under the new law, yet to be approved by parliament, those unwilling to sign up for the amnesty and pay their taxes will face having assets seized, cell phone connections frozen and could be barred from leaving Pakistan.

But Hafeez Pasha, a senior economist and former finance minister said the government should be cracking down on tax-evaders, not letting them off the hook.

And he warned that the amnesty was effectively an invitation to launder money, as people would not have to declare the source of any illicit earnings.

“It will erode the tax system. It will help people learn techniques how to whiten the black money,” he told AFP.

“The government should publish a tax directory and shame the evaders instead of bringing out this scheme. This amnesty will destroy the tax system.”

Getting bills paid — be they electricity, gas or taxes — is a perennial problem in Pakistan, where people with political connections can default more or less with impunity.

Hakeem said part of the FBR plan was to identify the “elite” by their spending — when someone bought or sold a high-value house or car, for example, details of the transaction would be passed on to tax authorities.

“The lawmakers or the politicians, if we count them all, should not number more than 2,000, but what about those who are in millions, living luxurious lives, sending their kids abroad for excursions or studies who don't pay taxes?” he said.

Ashfaque Hassan Khan, Pakistan's former chief economist, said the plan was unfair to those who did pay tax and would encourage others to wait for similar amnesties in the future.

“This scheme is discrimination in favour of cheaters and evaders,” he told AFP.

“This will prove to be a channel for more corruption and will help people make money illegally and then legalise it through such schemes.”

The International Monetary Fund (IMF) bailed Pakistan out with an $11.3 billion loan package in 2008, but the deal was ended last November after Islamabad rejected strict reform demands, largely over tax.

The IMF has repeatedly warned Pakistan needs to make urgent structural reforms to boost growth, currently scraping along at around three percent, enough to absorb its rapidly growing population into the workforce.

The Washington-based lender has urged Pakistan to bring in a general sales tax, which it says could generate another three per cent of GDP in revenue, and introduce property taxes.

The government hopes the amnesty will help it meet its target of collecting 2.37 trillion rupees in tax this year, 10.1 per cent of GDP — up from 1.33 trillion in 2008-9.

The amnesty has been approved by the cabinet and the government hopes to push the law through parliament in the coming weeks.

But a general election is looming and Pakistan is a country where grand plans often come unstuck when they encounter political realities. Tax reform is a mammoth undertaking and Hakeem sounded a note of realism.

“I don't know whether I will succeed or not but I am taking a chance,” he said.