Daily Times

Prime Minister of Pakistan has revealed his agenda of economic reforms. The salient features includes income tax relief, a simplified process of property valuation, and an amnesty scheme for undeclared domestic and foreign assets.

The good news is that income tax slabs are made simple, income tax rates for individuals are reduced, and their tax exemption limit are increased. With the depreciation of rupees against dollar and potential inflation not only due to currency depreciation but also due to increased cost of energy and imported fuel, raising the bar for tax exempted income was much desired. A person earning 1.2 million rupees per annum would save around Rs 60,000 now whereas someone earning Rs 10 million would save around 1.2 million rupees in tax liabilities. FBR would see a drop in its direct tax collection (around 100 billion rupees), but it would not be more than 6.3 percent of the total direct tax revenue target for 2017-18. Hence it is a high visibility low (revenue collection) impact initiative that would provide some relief to salaried class in Pakistan.

The bad news is drastic reduction in number of existing tax filers. Sustainable Development Policy Institute (SDPI) carries out a yearly analysis of FBR tax directory. According to our analysis this initiative would benefit at least 0.6 million individual tax filers, which means reduction in number of tax filers from existing 1.2 million to 0.6 million. FBR would have to be proactive not only to increase the tax base, but also the number of tax filers. Senator Dar tried to replace NTN wit CNIC number but could not succeed. One has to see the strategy of FBR on tax net expansion in the months to come.

Another good news is that property valuation in real estate sector, which one may argue is the most vibrant sector for potential investors, has been simplified. Despite revision of FBR rates at federal level and deputy commissioner (DC) rates at provincial level, the property was still being undervalued. Now valuation has been left on the discretion of buyer and sellers, with the provision that federal government may acquire any property paying a premium on declared value, thus ensuring a safeguard for undervaluation.

As a compulsive tax payer, like all other salaried persons, I feel bad every time a tax amnesty scheme is announced. It is a disincentive to all honest tax payers, especially when such amnesties are granted frequently. So morally I am against amnesties

The problematic area here is that province may not buy this formula. ‘Real Estate’ is a provincial subject. Whether provinces would agree to abolish DC rate system, and whether federal government would be able to acquire a property in provinces are the issues which require consultation not only with the provincial governments but with the judiciary as well. Otherwise this scheme may not take succeed in all provinces.

The third pillar of economic reform package is an amnesty scheme for undeclared assets. There are at least four aspects of Prime Minister’s current ‘economic reform package’. A moral aspect, a financial aspect, a legal aspect, and a political aspect.

As compulsive tax payer, like all other salaried persons, I feel bad every time a tax amnesty scheme is announced. It is a disincentive to all honest tax payers especially when such amnesties are granted frequently. So morally I am against amnesties.

However, it can be argued that such amnesty schemes have been widely used in other economies too. Indonesia was able to fetch $ 20 billion ($11 billion undeclared assets, and $ 9 billion in penalties) during July 16 to March 17. Clearance levy in Indonesia started at two percent (within first 3 months) to 10 percent in last quarter. India too had an amnesty scheme from June 16 to September 16, on a much higher clearance levy of 45%. This scheme showed mix results. Comparing with these two schemes, Pakistan’s amnesty scheme is much attractive in terms of clearance levy (3-5 percent) and as the noose is being tightened on undeclared assets abroad so it has the potential to fetch few billion dollars back to Pakistan. The fear that OECD would start sharing information with Government of Pakistan on assets of Pakistanis abroad will be another factor turning this amnesty scheme a success.

However, there is a legal aspect to it. Those getting benefits from amnesty are protected against criminal prosecution through an ordinance. Although it is said in the ordinance that proceeds from crime and corruption are not covered under amnesty. However, excluding such proceeds would be difficult as the ordinance has a provision of confidentiality and inadmissibility of the declaration as evidence in a court of law. The confidentiality and inadmissibility would weaken our case in the FATF, where we have to prove ourselves as a FATF standards compliant economy.

The flip side of the above argument is that without an immunity from criminal prosecution, no one would avail this amnesty. The legitimate money lying aboard can be brought back through formal banking channels without paying any penalty and is tax exempted according to existing income tax laws in any case.

The last aspect which would decide the fate of this initiative is ‘political developments’. Keeping in mind that Prime Minister does not have a working relationship with Chairman Senate, and major opposition parties have raised voice against the amnesty scheme, the probability of getting the four ordinances covering PM’s economic reform package approved by the Senate is extremely low.

In normal circumstances, these ordinances could have been made part of the finance bill as annexures and got approved with the budget. However, keeping in mind the fissures within PML-N, would turn this move extremely risky for a government which is bound to leave in a month time after budget is presented in the parliament. It may jeopardise the approval of budget itself.

So one can assume that future of exemption from criminal prosecution would remain in limbo till next elections, by which the amnesty scheme would be over. If PML-N could not form next federal government, then the waiver from criminal prosecution is not certain. Beneficiaries may get tax immunity, but they may have to face NAB and other criminal charges. This is the biggest risk and bad timing may fail an otherwise attractive amnesty scheme for those who had hidden assets.

The writer heads Sustainable Development Policy Institute and tweets @abidsuleri

Published in Daily Times, April 13^th 2018.