Tax amensty: last nail in the coffin of Naya Pakistan!

Hassnain Javed

JULY 17, 2019

Idiocy, it is often said, constantly does the same thing and expects distinct outcomes. If this declaration is accurate, then we can conclude that the governing elite of Pakistan must alter its course of action regardless of political affiliation.

The Pakistan Tehreek-i-Insaf (PTI) appears to have run out of ideas on the financial front for nearly 10 months in power. A group whose management had pledged fresh thoughts and the country’s political economy’s structural revolution has endorsed a tax amnesty system, which in my opinion is quite close to proverbial last nail in the coffin of Naya Pakistan. However, the bigger issue is whether these systems of amnesty really function. According to most studies carried out around the globe, the response to this is mostly no.
Moreover, let me put forth this situation with the notion of moral hazard, which says there will generally be a lack of motivation to guard against risks when one is protected from its effects. In a simpler way, it means that people will take huge risks when they know that at the end of the day somebody will offer a way out without asking them to pay a significant bailout price. This generally refers to sectors that depend on state bailouts and a subject of much debate when the US government saved big banks and the automotive industry following the financial crisis of 2008. It also relates to Pakistan’s rich elites, who understand that governments will eventually give them amnesty with minimal implications after they extract wealth from the nation and get away with not paying their fair share of taxes. As a consequence, people, especially wealthier, are encouraged to avoid taxes and take hazards (evading taxes is a criminal offence in most societies) and conceal their wealth in precious metals, money, real estate, and foreign offshore companies.

Now, let me share some of the evidence from abroad who have launched amnesty schemes. This subculture is not peculiar to Pakistan and their citizens indeed amnesty schemes have been given by nations such as India, Greece, Argentina, Russia, and others. Researchers and scholars who researched these systems found that this policy was ineffective mostly. The same as Pakistan, India has in the past provided several such schemes, and while its government has a stronger record of tax collection than we do, its amnesty schemes achievement is rather marginal. In 2016, the government led by the Bharatiya Janata Party announced an Income Declaration Scheme that resulted in the disclosure of over INR650 billion (about $9-10 billion) of undisclosed assets. The system led in government taxes in excess of INR29 billion (around $400-450 million), covering 0.2 percent of total tax receipts, which was $211 billion in the Indian budget for 2016-17. This implies that the taxes collected through this policy, despite being a main objective of the Indian government, were meagre in the bigger system of things.

Likewise, Russia has also attempted its hand with amnesty systems and a paper published by Georgia State University scholars in September 2009 analyzed its impact after the Soviet Union collapse. After an extensive study, the scientists found that “these amnesties had a little verifiable continuous effect on revenue” and that “using fiscal gadgets like amnesties imposes extra expenses” and that “nations would be better off avoiding them.”

The sad reality here is that those in authority in Pakistan do not appear to believe in conclusive proof-based policymaking and learning from case studies around the world

However, Argentina’s latest experience of it is one of the few tales of achievement. The 2017 amnesty system brought more than $116 billion in assets from offshore places to the South American nation (far more than the goal of $20 billion), including Switzerland and the United States, and profits of over $9 billion. This rendered it the most effective such initiative in the globe, enabling the higher opportunity for investment in the country’s economic development for the Argentine government, which was experiencing a financial crisis at the moment. One reason for the achievement of the scheme was that not only did Argentinians have to pay a 10-15pc penalty and register their assets, they also had to liquidate and invest them in government bonds at 0pc interest rate for a period of three years or at the 1pc interest rate for a period of seven years. Secondly, Argentina has been involved in global projects to transfer data and make it more difficult for OECD people to conceal their wealth overseas. Also signed was a bilateral data exchange arrangement with the US, which persuaded Argentinians to expel their offshore property back to the nation.

Apart from this, there are many reasons why amnesty schemes always fail in Pakistan. This amnesty system is the fifth that has been given since 2013 to tax evaders, strengthening the moral hazard issue.

Its wide contours are comparable to the 2018 scheme announced by the outgoing Pakistan Muslim League-Nawaz government. The current scheme charges a 4pc money penalty stated and deposited in Pakistan’s banking system, while those wishing to retain their wealth overseas will be charged 6pc in contrast the 2018 scheme enabled individuals to return foreign exchange by paying a 2pc penalty. Moreover, declaring foreign exchange to be charged if there is any declaration of foreign liquid assets like bonds then have to pay a 5 percent penalty. The 2018 system was able to increase nearly Rs100 billion, about 2pc of the total Rs4.3 trillion tax revenue anticipated in the budget of that year. More than 55,000 individuals took the opportunity to declare in assets over Rs1,500 billion, the highest amount declared in the history of Pakistan under any amnesty scheme. There is no accessible information, however, suggesting that tax compliance has risen following this system, and one can securely say that incentives to avoid taxes have stayed in place.

In order to conclude, since the PTI system has little new to offer, one can securely claim that its choice will not result in any significant change in the behaviour of taxpayers or the stated objective of enhancing the size of the existing economy of Pakistan. In addition, this system does not learn from the narratives of global achievements, such as Argentina. Investing the newly declared assets in government bonds is not compulsory. However, Pakistan signed last year the OECD Multilateral Convention to obtain access to data on offshore accounts of Pakistani citizens. However, more evidence that is noticeable is needed that the government is working on this issue with the OECD or countries such as Switzerland and the UK. Moreover, like those in the past, the PTI government has not fully clarified the paddles it will use to go after people unwilling to declare their property. There have also been claims to use “information” and “automation” in the past and should, therefore, be handled as demagoguery. The absence of studies carried out before such significant choices are made is also worrisome. After all, a country that has offered multiple amnesty schemes should at least conduct studies, collect survey data to determine why people do not pay taxes and evaluate best practices from around the globe prior to policy development. The sad reality here is that those in authority in Pakistan do not appear to believe in conclusive proof-based policymaking and learning from case studies around the world. Lastly, like its predecessors, the PTI is as true in economic reforms packaging novelties.

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