Pakistan needs to strike tax dodgers
After the recent amnesty scheme announced by the PML(N) Government, for the real estate sector, one hears that another amnesty scheme covering a much larger ambit this time, is on its way and will be announced in the first quarter of 2017. Amongst the genuine tax payers who have been discharging their tax liabilities honestly and diligently such schemes are always disheartening, as invariably the message they give is that it is alright to cheat the system and shirk one’s responsibility to the national exchequer, because sooner or later you will be rewarded by an opportunity to clean the slate at a nominal cost. However, for economies like Pakistan where tax to GDP ratios are stubbornly low with (the proverbial) too much water flown under the bridge for the un-documented sector and corruption is embedded in the tax collection system, such schemes some times carry value and even deemed necessary to sort off declare a time out and then start afresh with a firm tax collection resolve. The trouble though is that as seen in the past in Pakistan the post scheme firmness in tax collection remains amiss resulting in tax evaders getting rewarded without yielding any real advantage to the existing cum honest taxpayers.
Therefore, when drafting such a scheme the key to its success always lies in ensuring that the adopted legislation: specifically targets segments and personnel in mind; is short-term and result oriented; carries coercive repercussions for evaders once the amnesty period expires; has a clause that the scheme cannot be repeated in any form for at least a decade; and carries significant rewards for all existing taxpayers who have been dutifully discharging their tax responsibilities. As we look, there are a number of countries that in recent times have successfully drafted and implemented amnesty schemes with good results. For example, Indonesia is set to cash in on a model of tax amnesty recently announced by its government. Locals have already declared assets worth almost $200 billion in the first three months of the nine-month program. That is a decent chunk of the about $900 billion that the authorities estimate citizens have squirreled away in tax havens like Singapore. About $5.7 billion in proceeds will ease pressure on the public purse. The haul is enormous by global standards. Italy managed to persuade citizens to declare about 60 billion Euros, or $65 billion, last year. Argentina could raise as much as $80 billion in its current amnesty.
Another upside is that it also retards funds outflow, as successful wealth-generators invariably avail such schemes, thereby not only exposing them but also making it difficult for them to return to their old ways of funneling money abroad. Again for example, in Indonesia, we see that prominent figures are rushing to participate, including James Riady, the Lippo Group boss, and Hutomo Mandala Putra, known as Tommy, a son of the deceased authoritarian president Suharto – Our Panama listed personalities may also like to take a similar step forward once offered a chance! In case of Indonesia though a low penalty is one reason the program has already performed so well. Citizens who come clean before the end of the deadline have to pay 2 percent on funds repatriated and 4 percent for money left overseas. Another reason for success is that it is the first amnesty in a while. Indonesia’s last effort was almost a decade ago. Citizens need to believe the reprieve is effectively a one-time offer to take part. One reason such projects have often performed badly in other places, like India, is that they are too frequent.
A credible government helps too. Sri Mulyani Indrawati, formerly at the World Bank, returned in July for a second stint as finance minister and is seen as a safe pair of hands to restore economic stability (now we here may be somewhat disadvantaged on this count). The very fact that Mulyani commands so much of respect and trust should in-turn also create better investment opportunities with the cash that as a result is repatriated back. And then, Indonesia has a big stick too – abstainers caught later will have to pay a 200 percent penalty. Finally, these schemes these days are also being seen as essential – for one-time and to be announced as quickly as possible – because on the international front the global financial reporting laws are transforming quickly. The introduction of “Common Reporting Standards”, an international program forcing the exchange of information on account holders across different jurisdictions, is making it harder to hide from the law. So, perhaps now is also a good time for Pakistan to strike on its tax dodgers.
