There is a lot of politics going on the recently announced tax amnesty scheme by the PML (N) government with the debate (if you can call it that) ranging from the timing; mandate of the government to even announce such a scheme; whom will it really benefit; rewarding the evaders; to the possibility of challenging it in the supreme court; etc. The last concern of the critics seems to be the quality of the announced scheme and whether or not it will in any way benefit the national economy.
So why are tax amnesty schemes really needed and is it an initiative that Pakistan alone has resorted to or is it something, which is quite common in other developed and developing economies as well? The answer to the first question is that if over a period of time a culture emerges where a large part of taxable population either avoids taxes or simply operates in the un-documented sector or siphons off a significant portion of its wealth to foreign shores, then every so often governments do resort to providing a window of opportunity whereby this wealth can be brought back into the national domain and provide an impetus to the much required development agenda at the time. In Pakistan’s case it makes good sense as we see that our tax to GDP ratio is one of lowest not just regionally but also globally, and this amnesty announcement comes at a time when the economy is confronted with a serious foreign currency crunch. The external account appears to be the Achilles heel of our economy and just to meet our international commitments cum obligations, it is estimated that around $13-15 billion in borrowings will be required during the coming fiscal year 2018-19. And to answer the second question, Pakistan by no means is alone in announcing such a scheme to lure hidden national wealth, as just in the last 5 years there are numerous examples of both developed and developing countries or even financially independent states (within the larger economy) who have announced such limited period tax amnesty schemes. Lets have a look at some of the recent examples.
Argentina: Size of its GDP: USD 546 billion. A scheme was announced in 2016 lasting nearly 2 years. Purpose: To repay pensioners. Estimated wealth stashed outside: US$500-billion. Cost for the whiteners: Between zero and 15 per cent depending on the amount and when it is brought back into the country. Result: Argentina as a result has raked in $116.8 billion, almost six times more than it expected. The government collected 148.6 billion pesos ($9.652 billion) in taxes and fees from the amnesty, revenue that will help the government meet its target for a fiscal deficit of 4.2 percent gross domestic product this year. Nearly 80 percent of assets declared came from the United States and Switzerland. Close to $56 billion of the amounts declared were foreign investments, of which 30% were held in the US, 26% in Switzerland and 15% in the British Virgin Islands. Locally, only US$900 million came forward to get registered.
Russia: Size of its GDP: USD 1.28 trillion. A scheme was announced for 3 years, from 2016 to July 2018. Purpose and Cost: Primarily to allow Russian citizens to inform the authorities of their foreign assets. In exchange, the authorities will not ask about the source of the money used to buy the assets declared and will not impose any tax, administrative or criminal liability on the declarant. The second stage of the amnesty was also “free of charge”, meaning no taxes were levied on the declared assets except for fixed deductible tax on global financial instruments. The key being that onwards, future income from these declared assets will be taxed, but at the same time, declarants will not have to repatriate their assets to Russia. However, anyone previously convicted of tax crimes such, as tax evasion, corruption, etc. will not be eligible. Result: Russian finance ministry claims that almost 60 percent of the foreign hidden assets have now been registered, which will serve as a huge future revenue generation opportunity for the country.
India: Size of its GDP: USD 932.3 billion. A scheme was announced for a window of 4 months. Purpose and Cost: It was estimated that the government could raise nearly $4.5bn from the scheme. Undeclared income or “black money” is a huge issue in India. The government contacted about 700,000 suspected tax evaders during the given window, urging them to declare hidden income and assets. The non-filers were told, the authorities would not pursue them if they came clean and paid a small penalty. Immunity from prosecution was offered in return for paying the applicable tax along with a minor surcharge and a token penalty. Result: Assets worth Rs652.5billion ($9.8billion) were declared, implying a boost to government revenue of Rs294billion on an on-going basis. The amnesty attracted, 64,275 declarations, with the average amount declared standing at Rs10.2million. Ironically, from those who came forward was also a group of street food owners in Mumbai who are said to have declared nearly $7.5m.
Indonesia: Size of its GDP: USD 2.264 trillion. A scheme was announced in two phases of 3 months each, July to September 2016 and October to December 2016. Purpose and Cost: With a high fiscal deficit and pressure on its external account, the government decided to tap the hidden wealth of the Indonesians rather than resorting to mere borrowing. The costs associated with the scheme to declare hidden wealth render some important lessons for similar economies (like ours): Mainly, that if rules are made too strict then such schemes bear little fruit. This was witnessed in the first phase of the scheme where the government set the requirement that repatriated funds need to remain in Indonesia for at least three years in specific investment instruments. For many taxpayers this was an unattractive option. Another unappealing matter was that tax incentives under Indonesia’s tax amnesty program only applied to historical tax liabilities. Meanwhile, new income was to be taxed at the normal rates (that are significantly higher compared to the rates in tax havens). Subsequently, the rules were relaxed and lo and behold in the second phase Indonesia, Southeast Asia’s biggest economy, managed to implement one of world’s most successful tax amnesties, with at least 745,000 taxpayers declaring more than $330 billion of assets.
And then of course there are nicer tax evasion problems to have. Here, wealthy nations or rich economic blocs recently offered specific amnesties encouraging largely their own big boys of the corporate world and wealthy individuals to bring back their wealth to the national taxable domain. Interestingly, these very countries or states had in the past consciously facilitated creation of their own tax havens to show these high net-worth individuals/companies the path to dodging taxes! Examples here being: the European Union, States of Pennsylvania and California, etc.
Now compare all this with the realities at home. Pakistan’s GDP’s size is USD 283.7 billion, and like the Indians a good chunk of the Pakistanis are also known to be operating either outside the taxation net or have large amounts of assets (cash & real estate) hidden abroad. Even if we disregard the experiences of other continents and just go by the Asian benchmarks, between Indonesia and India the relative potential (according to the respective GDP sizes) dividend of the Pakistani Tax Amnesty scheme can easily be set anywhere between $ 2.5 to $ 6 billion, not just through outright collections, but also by creating new on-going revenue sources - meaning (safely) nearly one fourth of our required financing needs in the next fiscal year. Finally, one is at a loss as to why any political party or institution will be opposed to it, since on the contrary the timing seems perfect: In the sense that not only is it for a limited period of time (two and a half months) and also in that its economic benefits will in fact be reaped not by this government, but by the one that steps in!
The writer is an entrepreneur and economic analyst.