Spearhead Analysis – 09.04.2018
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
“The more corrupt the state, the more numerous the laws.”. (Tacitus)
Publius Cornelius Tacitus, the renowned Roman Senator and Historian, aptly summed up the intent of a State in promulgating frequent laws. In Pakistan, instead of implementing required structural institutional reforms successive governments have relied on introducing and amending laws for their short-term gains. As in the past, the Government of Pakistan has once again succeeded in creating a major controversy, through an ill-conceived, badly timed, and hardly discussed Tax Amnesty Scheme. For all intent and purposes it appears to be a scheme to appease those with hordes of undeclared assets by paying a paltry penalty. It is a scheme that has all the ingredients to run afoul of the Financial Action Task Force (FATF), and one that has neither been debated in the Parliament nor discussed with the institutional stakeholders within the country. It is therefore no surprise that it has been met with either vehement opposition or ominous silence. The scheme has been backed by Ordinances signed by the President of Pakistan, which have a limited validity, leaving the window open for the next government to question the scheme and those who participate in it. The fact that the Government has launched this scheme for a time period that basically coincides with their exit date, appears to be strange to say the least. The question that comes to mind is: If the intent was to increase the tax base, bolster the reserves and enhance government revenue, why was this scheme not introduced at the start of the tenure of the government and run for a longer time period? Why were the institutional stakeholders not taken on board; and why was it not discussed in Parliament and provided the required legal cover? These are questions, which create doubts about the real intent and efficacy of the scheme and could severely reduce its intended impact.
The FATF has voiced its concerns about the scheme in the context of the global fight against terror financing and money laundering. It has also been stated that the Government failed to seek approval for the tax amnesty scheme from the FATF prior to its announcement. At a time when Pakistan is being watched and likely to be placed on the FATF Grey List by June 2018, this appears to be a serious transgression and one that the government should have been cognizant of. Dr. Miftah Ismail has conveniently stated that: “There is nothing to worry about, as the legal team has assured me that the proposed package is in compliance with the global standards on anti-money laundering”. These assurances are similar to the ones before the FATF meeting in February, 2018 when the country was assured that Pakistan would not be placed on the Grey List. The total lack of support for Pakistan during the voting process in FATF demonstrated the ‘veracity’ of those claims.
While it has been announced that there would not be immunity from prosecution under the Anti-Money Laundering Act 2010 for those availing the scheme, it remains to be seen how compliance would be ensured to meet global standards on money laundering and terror related financing. The government needs to submit an action plan to the FATF by May to avoid being put on the grey list in June. In the event of the government failing to submit the action plan, FATF has the option of placing Pakistan on a blacklist, with even more severe implications. The issue needs to be carefully evaluated and policies made in discussion and compliance with the FATF, to avoid any adverse impact.
It is indeed surprising that the government has raised the minimum tax exempt threshold from Rs.400,000 to Rs.1.2 Million just days before the end of its tenure, and when the country is faced by woefully inadequate tax revenue collection. Clearly the motive was to appease a large voter base just prior to the coming elections. The Federal Board of Revenue (FBR) appears to have distanced itself from parts of the scheme, as there are operational issues on taxation pertaining to local undeclared assets, real estate tax regime and the taxes for individuals and Partnerships. It is being quoted that as a result of the reduction in the tax rates around 500,000 plus tax payers would be removed from the list of tax payers and a tax collection loss of Rs.90 Billion could be incurred in monetary terms. While the government would argue that this would be compensated by the potential increase in the number of tax payers, especially in the 15 per cent category, that is largely dependent on the effectiveness of the implementation of the scheme.
The FBR feels that the scheme was announced with haste, lack of proper analytical groundwork and the inherent risks have not been quantified. For example, real estate is a provincial matter and the federal government cannot attain a right to acquire the property, which could become a constitutional issue, and one that could be challenged in the court of law. There is also a lack of clarity around which federal body would administer and acquire the property if the declared value falls below the market price. Similarly, there are fears around the erosion of the tax base. As before, Dr. Miftah Ismail has stated that it is the responsibility of the elected leadership to make policy decisions. The question is at what cost?
There are contradictions in the scheme, which are not exactly going to instill confidence in those considering the option of availing it:
- How can all CNIC holders be expected to submit a Tax return, given the low literacy rates; and is the FBR equipped to review the millions of potential returns that could start pouring in?
- Does the immunity under the scheme lapse on the expiry of the Executive Ordinances or will it be provided proper Legal cover?
- What assurances and legal cover is there to stop the next government from questioning those who partake in the scheme?
- What if people start approaching the Court against the scheme?
These are some of the questions that come to mind and need to addressed, not merely through verbal assurances, but through concrete measures that provide legal cover. FATF has to be satisfied about the mechanics of the scheme and FBR needs to fully on-board and operationally equipped to manage the scheme. The Pakistan Tehreek-e-Insaaf (PTI) has rejected the 5-point scheme and threatened to approach the Supreme Court of Pakistan. The government by acting in haste, as in the past, and not taking the other stakeholders into confidence may have jeopardized the scheme. This, however, is nothing new as the government seems to be in the habit of bull-dozing past obstacles in haste to create waste.