Amnesty Scheme to raise tax revenue of Pakistan
Everybody knows that Pakistan gets very little revenue and most of its foreign assets are kept outside Pakistan. Governments try to rectify these pitfalls with no success.
The leading business communities normally invest their money outside Pakistan and on questioning for source of money they always say that the money has been brought from Pakistan.
An amnesty scheme of the PPP government of 2008 was in the offing allowing rich Pakistanis to whiten black money by paying only two percent taxes. It generated only Rs2.8 billion; of the amount.
Here questions arise about the efficacy of amnesty schemes and whether the latest move by the PML-N government for bringing traders into the tax net through yet another amnesty will be beneficial in the absence of FBR reforms.
First amnesty scheme of Pakistan was brought by the first-ever military ruler Ayub Khan. It succeeded in bringing the public contributing seven percent revenue to the GDP.
The second amnesty granted by Gen Yahya Khan in 1969’s revenue contribution to the GDP was only 1.52 percent and 19,600 persons were brought into the tax net.
The third was offered by Zulfikar Ali Bhutto that collected revenue of 2.2 percent of GDP.
The fourth scheme was during Gen Zia’s regime in 1986 that contributed not more than of the 1976 amnesty.
That followed an amnesty by the PML-N government in 1997. Although no analysis in terms of the revenue contribution to the GDP is available, yet this money-whitening package generated a meager sum of Rs141 million tax revenue.
As far as the recently announced amnesty is concerned, it is not general in nature but only traders’ specific. It will disillusion the honest taxpayers. There is no second opinion about this contention but whether we have an honest taxpayer or not should be the foremost question.
Other than salaried class that can’t avoid paying tax and the compulsory indirect tax, there is hardly any Pakistani claiming to be honest taxpayer.
Also the fact remains that the rich are granted amnesty in different forms and one of such was announced during budget of 2015-16 declaring tax exemptions to industry in Khyber Pakhtunkhwa for five years.
The amnesty for traders can’t be better described than a carrot and stick policy. The government first imposed withholding tax of 0.6 percent tax on the banking transactions of non-filers and then reduced it to 0.3 percent by bringing traders to the negotiation table.
Official figures have found 3.5 million traders throughout Pakistan and only 135,000 are in the tax net. Trading sector constitutes around 19 percent of the GDP but traders’ tax contribution is only 0.05 percent meaning thereby they are virtually out of tax net. Same goes with agriculture sector that forms 21 percent of the GDP but zero tax contribution.
The optimism is not out-rightly misplaced. A refusal to enrolment under this amnesty means an escalating business cost in form of withholding tax of 0.6 or 0.3 percent at each transaction of Rs 50, 000. That will follow notices from the FBR on the basis of banking data and any protest by non-availing traders attracting no attention. This tax on banking transaction is likely to increase further up to one percent after the grace period of benefiting from amnesty is over.
While opposition parties are dismissive of this policy, including PTI leader Imran Khan, Assad Umar is supportive of it and firmly believes that the energy should be directed towards its improvement instead of politicizing it. He is of the view that in the presence of 1993 legislation FC brought from abroad cannot be questioned or taxed, the success of current amnesty scheme comes under question.
Majority of the businessmen in Pakistan have been routinely sending money through different channels abroad and bringing it back in shape of foreign remittances with only two percent tax on banking transaction. Money laundering flourishes under the garb of remittances’ basing report on some case studies where billions have been recycled through this channel.
Thus enhancing tax rate for traders under this scheme means defeating the purpose of amnesty as they are likely to whiten money through other channels and remain undocumented. Instead of questioning one percent tax rate, amendment in tax law should be demanded for empowering tax officials to question the source of remittance.
This preferential treatment to the traders unlike other taxpayers who have to declare assets no matter the declared income is less than one million, should be abolished.
Other issues meriting consideration are the reforms of tax administration. What if traders are brought into the tax net but the FBR is not capacitated enough to ensure due recovery from them.
While the government is bent on bringing them into the net, a matching number of rich individuals discovered by Nadra have gone unaccounted by the FBR since there are many influential figures enlisted.
A study by Nadra in 2012 found 3.5 million rich Pakistanis who frequently travel abroad, live in posh areas, operate multiple banks accounts with more than one vehicles registered in their names but are out of tax net.
Instead of training guns at the government for this scheme, the media, civil society and parliamentary opposition should focus on making this a successful attempt through demanding reforms in tax administration that include its autonomy having tenure-protected chairman who could perform duty diligently and independently in absence of any political pressure.
Less than that, business will remain as usual. No amount of reform commissions will help without implementation of recommendations. Like amnesty scheme, many commissions have been set up before. The commission formed by the PML-N government is not the first one.
New tax reforms announced by the outgoing PML N government have five major but simple points that can be understood by any person.
1. CNIC number to become NTN tax number
2. Reduction of income tax rates- In new tax reforms government have revised the tax brackets, and newly revised tax brackets are very simple and easy to understand. The government previously used 12 tax brackets for salaried individuals and eight for self-employed individuals to calculate their income tax liabilities, which was very complex but now these have been reduced to 4 tax brackets. Complete tax exemption bracket on your annual income has been increased to Rs 1.2M, that means if you are making Rs.100000/month or less you will not be entitled to pay any tax and will be eligible for complete tax exemption. And maximum tax bracket has been reduced from 30% to 15% on more than Rs 4.8M/annum.
Complete Tax exemption on annual income up to Rs1.2m
5% tax on annual income between Rs1.2 and Rs2.4mn
10% tax on annual income between Rs2.4 and 4.8mn
15% tax on annual income above Rs4.8mn
3. One-time tax amnesty scheme:-The government has also given a chance to non-taxpayers to declare their assets and income from any local source or from abroad by paying nominal penalties. This Amnesty scheme has been offered for only one-time exemption from accountability law upon the declaration of your assets.
Local liquid assets at 5% penalty;
Foreign cash assets at 2% penalty;
4. Assets/fixed property abroad at 3%;
5. Any acting politician and/or their dependents are not eligible for this Amnesty Scheme.
Real estate market is the heaven for tax evaders and people have been using real estate to park their undeclared or black money. There has been a huge difference between the actual value of the property and the declared value or the value at which that property is registered. This point in tax reforms states that:
“On any property that citizen purchases, they will have to pay one percent “presumptive tax”, which will be adjusted in their annual taxes. Maximum 1% tax (local and provincial) for registration of property being recommended. At federal level Adjustable Advance Income Tax being reduced to 1%. Furthermore, the FBR rate on the property being abolished from 1st July 2018 and provinces being requested to abolish the DC rate, No purchase of property over Rs 4 million is possible for non-filers of tax returns from July 1, 2018?.
In order to reduce the practice of under-invoicing which is very common in real estate, now the Government has a right to buy any property that a citizen has by paying 100% over its declared price. That means the Government can buy your property by paying you double of the declared price of your property. This will hold for six months from the registration of the property starting fiscal 2019.The rate will fall to 75pc in fiscal 2020 and 50pc in fiscal 2021 to disincentives underreporting.
6. Monitoring & Compliance of taxpayers:-The Last main point of new tax reforms is the monitoring and compliance of taxpayers. The government will monitor financial transactions of every individual having CNIC and will issue notices if it finds tax evasion. According to the PM Parliament will decide the penalties for tax evaders.
The fate of Amnesty scheme whether it gets another timeline as has been demanded can be described better by Moody’s new rating for Pakistan.
According to Moody’s, Pakistan is facing external pressures, with higher imports largely from CPEC weighing on the current account and foreign reserves, The agency revealed that the State Bank of Pakistan has allowed the currency to depreciate by about nine per cent in total whereas the interest rate raised policy rates 25 basis points to cool domestic demand. Foreign reserves continue to decline and reached a 34-month low in March 2018, it noted.
Moody’s Investors International has downgraded Pakistan’s outlook to negative from stable citing factors like “heightened external vulnerability risk” and “low reserves adequacy”.
The downsizing of Pakistan’s ratings came ahead of the general election in the country on July 25.
Moody’s said the decision to change the ratings of Pakistan’s economy was taken because of the heightened external vulnerability risk as ongoing balance of payment pressures made foreign exchange buffers.
The Pakistani Rupee has since suffered devaluations with the US dollar selling for around PKR 124 in the market and currency exchange dealers reporting a shortage of dollars.
Moody’s also predicted that the government’s tax amnesty scheme, which will expire on June 30, will have a modest impact of USD 2-3 billion in foreign exchange inflows. The rating agency also affirmed the B-3 local and foreign currency long-term issuer and senior unsecured debt ratings.
It said the decision to affirm the B3 ratings reflects Pakistan’s robust growth potential, supported by ongoing improvements in the energy supply sector and physical infrastructure, which are likely to raise economic competitiveness over time.
According to Chairman FBR and SBP 40 applications per day are being received and $ 35 million has been received but this is very little amount against Pakistan need, so most likely Pakistan would have to resort to IMF to redress its FC issues.
Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), former Head of FSCD SBP, former Head of Research Arif Habib Investments and Member IFSB Task Force for development of Islamic Money Market, former Member of Access to Justice Fund Supreme Court of Pakistan.