Tax amnesty for whom?

The Political and Strategy Committee (PSC) of Pakistan Tahreek-i-Insaf (PTI), in a meeting held under its Chairman Imran has expressed deep concern over the introduction of Tax Laws (Amendment) Bill 2012 in the Parliament. The party warned against passing the Bill by the National Assembly, making it clear that if the bill was passed, the PTI would challenge it in the Supreme Court of Pakistan as the scheme was another form of NRO to legalise the corruption of around 2.7 million corrupt and filthy rich tax evaders.

A statement issued after PSC’s meeting said: “It is resolved that the PTI will not allow the 2.7 million tax evaders to benefit from the tax amnesty scheme which was violative of the fundamental rights of Pakistani citizens”.

Acceding to a report published in Business Recorder of January 8, 2013, “FBR has decided to serve notices to 0.2 million ‘super rich’ individuals to file income tax returns as well as wealth statements under section 114 and section 116 of Income Tax Ordinance 2001 respectively.

It is revealed in the report that the “super rich” people have been picked on the basis of their expenditures and high consumption lifestyle. The report, while questioning the legality of such a discriminatory action has pointed out that “these 0.2 million super rich have not been excluded from Tax Registration Enforcement Initiative 2012 (TREI 2012) and Investment Tax Scheme 2012”.

The schemes have not specifically mentioned anywhere about exclusion of 0.2 million super rich persons. It further says that “any discrimination among the citizens would be challenged in courts”. The opinion expressed in this report is certainly based on misinterpreting Article 25 of the Constitution of Pakistan which in tax matters gives leverage to exclude such persons from the scheme.

In the case of these ‘super rich’, if FBR has definite evidence of avoidance of tax, proceedings can be initiated for assessment, penalty and prosecution. It is, in fact, heartening to note that FBR has finally shown some firmness to tax the rich and mighty – provided the process is not selective.

The report further reveals that these super rich – 200,000 individuals – have not even obtained National Tax Number (NTN). These persons, FBR says, will have to pay their due amount of taxes as they are making highest expenditures in Pakistan, but not ready to even obtain the NTN. It is time that FBR joins hands with Transparency International Pakistan and makes this process transparent.

It is pertinent to mention that Benazir Income Support Programme (BISP) on January 2, 2013 signed a memorandum of understanding (MoU) with Transparency International Pakistan in its endeavour to further strengthen its accountability mechanisms. If BISP can take such a step, why FBR is avoiding Transparency International Pakistan is not understandable.

It is strange that FBR instead of proposing asset-seizure legislature to confiscate untaxed assets is insisting for a general amnesty for tax evaders and that too at a rate which is obnoxiously low. According to the proposed scheme that was cleared by the Senate Finance Committee and is now with the national assembly, the following unprecedented concessions have been offered to the tax evaders:

— just pay registration tax of Rs 40,000 (first month), Rs 50,000 (second month) and Rs 70,000 (third month) for legalisation of assets and income.

— where a person has paid registration tax, he shall be entitled to incorporate income/assets/ expenses with a declared value up to Rs 5 million in his books of accounts. He shall not be liable to any further tax, charge, levy, penalty or prosecution under the Income Tax Ordinance in respect of his income for any of the tax years prior to the tax year in which he has paid the registration tax. The contents of a declaration shall remain confidential and shall not be disclosed.

— the unregistered non-filers and registered non-filers who have made declaration under a scheme made under section 120B and desire to declare undisclosed income/assets/ expenditure with declared value exceeding Rs 5 million shall be required to pay in addition to Registration Tax, as defined in section 120B, Investment Tax on the declared value of the assets/income/expenditure exceeding Rs 5 million at one percent during first month of payment, 1.25 percent in second month and 1.50 percent in the third month.

— an existing taxpayer who desires to declare undisclosed income/assets/expenditure up to the declared value of Rs 5 million shall file a declaration under the scheme made by payment of token Investment Tax of Rs 100 and an existing taxpayer who desires to declare undisclosed income/assets/ expenditure with a declared value exceeding Rs 5 million shall pay Investment Tax as provided. Where any person has paid Investment Tax, he shall be entitled to incorporate income/ assets/expenses declared in the declaration filed under the scheme in his books of accounts.

— nothing contained in any declaration shall be admissible in evidence against the declarant for the purposes of any tax/charge/proceedings/penalty/prosecution under any of the following:

–Income Tax Ordinance 2001 as amended from time to time;

— Foreign Exchange Ordinance 2002 as amended from time to time;

— Companies Ordinance 1984 as amended from time to time;

— National Accountability Ordinance 1999 as amended from time to time;

— Federal Investigation Agency Act 1974 as amended from time to time;

— However, the immunity to declarants shall not extend to offences under

Narcotic Substances Act, the 1997 as amended from time to time; The Anti-Terrorist Act, 1997 as amended from time to time; and (iii) The Anti-Money Laundering Act, 2010.

In these columns (Business Recorder, August 20, 2012) we mentioned:

“One needs to remind the government of its solemn promise to the Parliament in 2008 that after ‘Tax Investment Scheme of 2008’ it would not introduce any more amnesty schemes-though it offered thereafter the same to stock exchange investors in April 2012 and all kinds of concessions to tax evaders in the months of May and June 2012 to achieve the budget target of Rs 1952 billion, but missed it by over Rs 70 billion”.

It is high time that our economic and tax managers should realise that amnesty schemes cannot be used as a measure to raise revenue as these discourage honest taxpayers and create distrust in State institutions. On the contrary, practical and workable steps should be taken to deal with the menace of tax evasion and increase revenues by adopting innovative means. Amnesty schemes, by their very nature reflect defeatism, do not curb tax evasion but on the contrary, encourage it.

It is an officially admitted position that prevalent tax gap of Pakistan is 70 percent – independent observers are of the view that collection of FBR should be four times of the present level as actual potential is not less than Rs 8,500 billion. The present assembly has three months left to complete its tenure of five years. It should not pass the controversial bill relating to tax amnesty. It should leave the matter to the next assembly. The government during its tenure has not shown any interest in fighting the menace of tax evasion, but during the last days is showing extraordinary enthusiasm to allow amnesty to the corrupt and criminals.

Pakistan, as we have mentioned time and again, has a permanent tax amnesty scheme in the form of section 111(4) of the Income Tax Ordinance, 2001 that facilitates tax evaders. It guarantees tax exemption for money brought into Pakistan through normal banking channels. This section protects tax evaders as they get untaxed money whitened by paying just an extra 1.5 percent to 3 percent to any money exchange dealer to get remittance in their names. This section has helped in bringing into Pakistan huge foreign funds as remittances, crossing the US $12 billion mark in fiscal year 2011-2012. This section has been abused cleverly by Pakistani tax dodgers to launder their untaxed money through state patronage!

Large-scale tax evasion and the existence of a large black economy while resulting in a colossal loss of revenue to the State, tends to reduce the built-in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary pressures and raise prices of real property. In the context of the prevailing grave challenge to combat terrorism, together with money laundering crisis, and the problem of ever-growing black money, (which according to official and independent experts is twice the size of the regular economy), there is an urgent need to launch a well-thought for asset seizure law to prevent this huge money from becoming a lethal weapon in the hands of mafias who are now in control of economy as well as the government. Before launching such a law it is important to identify the sources that generate black money. If such sources are not blocked, black money will keep on thriving notwithstanding the existence of stringent laws.

The presence of black money is very apparent in Pakistan, but its criminal accumulation and generation is not revealed and the offenders are not punished. This baffles the minds of honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties?

The people hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less an amount than what they would have been required to pay under the regular income tax/wealth tax regime. It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who are paying their taxes honestly at much higher rates than those offered to tax evaders in amnesty. The ugliest face of black money emerges in the corridors of power, political as well as administrative. No country other than Pakistan knows better the dangers of allowing money launderers and drug traffickers to get an upper hand. We are at present not only facing a drug-abusing population of nearly 4 million, mostly young, but also many terrorist organisations, which by themselves are a threat to the government. The fact is that a cartel or a group of cartels has become so powerful that they can work out agreements with terrorists and saboteurs to undermine the authority of the State.

The first and foremost objection to any tax amnesty scheme is that it betrays the honest taxpayer and the nation as well. The message sent out by repeated tax amnesty schemes is that taxes are regularly paid by only the honest taxpayers, whereas the “wise” wait to avail benefits of such undesirable schemes. Instead of going for new tax amnesty scheme, the government should consider the following:

1. Honest taxpayers who are filing returns regularly should not be harassed. Ninety-eight percent returns could be accepted while only two percent returns may be scrutinised through selection, based on a method that is both pragmatic and transparent. While administering tax laws, officers must encourage the culture of tax service rather than culture of tax collection. Tax Intelligence System (TIS) should be developed to detect tax evasion and under reporting.

2. Tax evaders must be dealt with strictly. Tax Intelligence System and the process of Survey and Search must be intensified and all tax evaders who have not been filing returns must be brought into the tax net. When a person is subjected to search, the Government should not invite that person/entity to any official function till clearance from tax administration. Even the social and political organisations should refrain from calling such persons as chief guests and the tax evaders should not be honoured either by the government or any political/social organisations. Any person who is awarded with State honour, if later found to be a tax evader, should be stripped of the honour.

3. Lowering tax rates, making tax administration efficient and granting refunds within prescribed time limit would encourage voluntary compliance. In Singapore, personal taxation ranges between 3.5 percent to 20 percent, while corporate tax is levied at 17 percent. With reduced tax rates, there would not remain any incentive to use the route of tax havens.

4. Increasing taxpayers by voluntary tax compliance. National Tax Number (NTN) should be compulsorily mentioned in the event of:-

a. Purchase of air tickets for local and foreign tours;

b. Sale/purchase of immovable properties where value exceeds Rs 2 million;

c. Payment of over Rs 25,000 on electricity and telephone.

The law must require transactions through banks in all payments and receipts above Rs 50,000, even in relation to agricultural transactions. This would substantially increase the tax base.

5. Encouraging honest officials and taking strict action against corrupt officials. When a government officer is caught for corrupt practices, a lot of publicity is given but the final outcome of the action is not made available to the public. Every year, FBR should publish such information on its website.

Laws alone cannot prevent the commission of crimes. Nor can a taxpayer whose position is that of a lamb before a corrupt wolf-like official, fight against corruption. It is the combined, united and forceful efforts of the government, taxpayers and tax practitioners that can do a lot for preventing corruption. FBR should engage Tax Bars in its efforts to fight corruption and revenue leakages.

Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan. According to figures released by independent quarters, the parallel economy is growing at an alarming rate of 22.93 percent per annum. Every fifth rupee transacted in Pakistan is black. This is not the final count. We have yet not accounted for kickbacks in arms deals, foreign trade, smuggling (eg huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic.

One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society. They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth. This shatters the faith of the common man in the dignity of honest labour and virtuous living. The best way to deal with tax evasion is not yet another amnesty scheme but asset-seizure legislation to confiscate all un-taxed assets at home and having provisions to seek help of international comity and organisation to bring back looted and/or untaxed money back.

The writers, tax lawyers and partners of Huzaima & Ikram (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences (LUMS)