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A controversial scheme

January 17, 2013

THE government might not be able to push it through parliament, but for now our rulers are lending support to a controversial tax amnesty bill. For a government about to complete its tenure and go in for an election, is this the right thing to do? There has been criticism of the proposed bill from opposition parties. Even some allies have termed it a ‘white-collar NRO’.

The chairman of the Federal Board of Revenue (FBR) has lent his support to the proposed legislation. It is worth going through the reasons cited for the bill as the issue will most likely surface later even if the current government is not able to shepherd the bill through the house.

A tax amnesty, to the extent people take advantage of it, allows the authorities to extend the tax net. It provides a stock of tax revenue in the year the amnesty is offered in the form of penalty that people pay for declaring their assets under the amnesty.

By bringing new people and new assets into the tax net there is expectation that there would be additional tax revenue generated in subsequent years. The amnesty also allows assets and income to be legalised and ‘whitened’. These resources can then be invested legally thus reducing distortions in the economy and creating growth and income-generating activities.

But amnesties have significant drawbacks. They reward people who have hidden assets, who have flouted the law of the land and have not contributed their fair share to the country. Amnesty tax rates, though in lump sums, are usually much lower (hence the incentive to avail the amnesty) than what rates would have been had these assets gone through the proper tax channels. Amnesties are also unfair to people who have been paying their taxes all along and are responsible, law-abiding citizens.

Amnesties bring with them expectations. Given how weak state structures are in Pakistan why should people not believe that subsequent governments will also offer amnesties? If people can hide assets and/or income for a few years, they might still be able to legalise them later, and at a much lower tax rate. This has happened before in Pakistan.

Even today there are loopholes: sources of income with regard to remittances are not probed. For those who are outside the tax net or have generated some income that is not documented or have undocumented assets, the latter can be liquidated and the money sent abroad through the hundi system. The money can then be brought back as foreign remittance and it will be all white and legal with a secure source (the remittance record) established.

The government, desperate for foreign currency, has no reason to close this door. But it does reward the cheats. The amnesty rewards the cheats too, and creates expectations for future amnesties. When some members of the opposition and even the ruling coalition termed the idea a ‘white-collar NRO’, they were not off the mark.

The FBR chairman, responding to questions from senators, had an interesting take on why he supported the bill. Though the FBR has a list of people who are not in the tax net though they should be, he would prefer to bring them into the net by offering them amnesty rather than going after them directly. He thought it would take the FBR too long to go after these people through legal means and there would be many legal hurdles to surmount.

More importantly, he thought that if the FBR went after these people it would increase corruption and the overall impact would not be positive.

So, rather than fix the system, the chairman is looking for a short cut. He feels that if the FBR has to work at getting these people into the net, the success rate will be low. And more depressing and disappointing is the admission that he expects corruption will further thwart efforts to nab them; that corruption might even increase due to the opportunities created by the pursuit.

It is not surprising that the chairman supports the short-cut approach to widening the tax net. Reforms in the tax system and the FBR, though they have been on every government’s priority list, have been extremely difficult to implement.

The resistance from within and lack of support from interest groups benefiting from the status quo have made reform efforts ineffective. But there is also pressure on the FBR, from government as well as donors/lenders, to raise more revenue. The chairman would clearly like to clutch at every straw he can.

The chairman did throw out the sweetener that amnesty would not be extended to a certain percentage of the biggest tax avoiders. But this further complicates everything and makes the case for amnesty even weaker. Any such law is likely to be challenged in court and the discrimination clauses will be, and should be, hauled up for review. There have to be good defendable reasons for a law that treats people differently. And would corruption not be an issue in pursuing the biggest clients?

The success of the amnesty scheme, even if it goes through, is not likely to be as significant as finance officials expect. Given our weak governance mechanisms and institutions, incentives would remain weak. Even if the other caveats are put aside, if people believe they will be victimised on entering the tax net or that the FBR would be too weak to pursue them if they opted to stay out, the scheme would be less effective.

The amnesty scheme has not been discussed publicly enough. Policies as significant as this should not be proposed or approved without a much larger, deeper debate in society, and by public representatives. They should definitely not be designed to give more power to relatively closed and unapproachable organisations like the FBR.

The writer is senior adviser, Pakistan, at Open Society Foundations, associate professor of economics, Lums, and a visiting fellow at IDEAS, Lahore.