ISLAMABAD - Tax amnesty is defined as “grant of an opportunity to a specific class of society to declare their undeclared assets by payment of a meagre amount of tax in addition to grant of immunity from default surcharge, penalties and prosecution”. It is introduced by the governments to fulfil the slogan of increasing tax revenues by tapping the informal economy, and is therefore offered in several European countries in addition to Malaysia, Canada, the USA, India and Pakistan.
Pakistan has a history of amnesty schemes introduced by rulers. The roots of these schemes can be traced back to President Ayub’s regime in 1958. In that phase, more than 70,000 declarations of excess income were filed by more than 260,000 taxpayers. Later, amnesty schemes implemented under Zulfiqar Ali Bhutto, General Zia and Benazir Bhutto proved to be quite unsuccessful.
Last year, the PML-N government also announced an amnesty scheme. As previous schemes, its purpose was to encourage people to become tax filers by being allowed to declare their hidden domestic and offshore assets. As per the scheme, tax evaders were given an opportunity to declare their hidden domestic and offshore assets at 5% tax rate. The scheme was also expected to provide a boost to the country’s depleting foreign currency reserves. However, the target for foreign exchange reserves was not met. Amnesty schemes from 1958 to 2018 could not generate significant amount of tax revenue for the country.
Amnesty scheme launched in 1958 recovered Rs1.12 billion from undeclared assets followed by Rs920 million in 1968, Rs1.5 billion in 1976, Rs10 billion in 2000, Rs3.16 billion in 2008 and around Rs120 billion in 2018.
The Panama and Paradise Leaks revealed accumulation of offshore assets by Pakistanis, reflecting flaws in the enforcement regime of the country, which ultimately led to disqualification of the sitting Prime Minister of Pakistan. The Foreign Tax Amnesty Scheme 2018 was announced by the government to give an opportunity to tax dodgers to declare their offshore assets. Many resident Pakistanis having offshore assets became part of the formal economy by availing the scheme which lasted till August 2018.
Retrieval of undeclared offshore assets was one of the points of the Pakistan Tehreek-e-Insaf manifesto during the election campaign. Present government created an asset recovery unit in Prime Minister’s Secretariat, and was seen sincerely and aggressively pursuing the task. The FBR established Automatic Exchange of Information (AEOI) Zones in Karachi, Lahore, Islamabad, Multan, Quetta and Peshawar for initiating and finalising proceedings against such tax dodgers. The information was shared with these zones of resident Pakistanis having offshore assets. These zones were seen as a beacon of light for the almost crippled FBR and the economy of Pakistan.
It was expected that the government will give special powers and resources to the zones for effectively checking offshore noncompliance. The AEOI Zones started operations by issuing notices to holders of offshore asset holders of Panama, Paradise, Dubai, United Kingdom and CRS. The zones had the support of the Supreme Court. In Dubai, there were cases where remarkable recoveries were made. The compliance ratio in the proceedings initiated by the zones was remarkable.
It is disturbing to see that the government has finalised yet another tax amnesty scheme without implementing an asset-seizure legislation to confiscate untaxed assets, and laws to bring back looted money from abroad. There is a consensus amongst tax experts that amnesty schemes are always a failed story. The honest taxpayers get discouraged when they see that tax evaders can get away with their crime by merely paying a meagre amount to the government.
However, in countries like ours where the institutions responsible for tax collection are not performing up to the mark, amnesty schemes can have a negative impact on the economy in the longer run. It is tragic to know that a country that accounts for billions of business on a daily basis has a low tax-to-GDP ratio. Tax collection has always been a challenge for Pakistan. Statistics reveal that out of the population of more than 20 million, only 1.4 million people file their annual income tax returns. Although in a short term, the tax amnesty schemes add a certain amount of revenue to the national economy; they are not a permanent solution to tax evasion. Instead of initiating a crackdown on benami (name-lender) transactions and imposing tax on undocumented assets, amnesty schemes provide tax evaders a back door to fool the system. Without taking necessary measures to tackle the menace of black money, amnesty scheme is an act of surrender by the state machinery to the tax evaders. It shows government’s helplessness in resolving the issue of tax theft.
Conclusively, necessary measures must be made to make the FBR and all other tax-collection bodies as effective as possible. We can never achieve our target from amnesty schemes unless we make sure that using best practices, the FBR will take care of all tax evaders without any discrimination. Last but not the least; it is believed that a significant amount of black money flies out of the country so that it cannot be raided. Therefore, a system needs to be put in place so that checks and balances can be maintained over flow of money to foreign countries. The future of an economically viable Pakistan lies in the elimination of red tapism, and the rule of law, not tax amnesties.