- Would the present scheme meet any different fate than its predecessors?
A new amnesty scheme is on the anvil. For politicians, few things are more irresistible than the thought of offering an amnesty scheme that would appease the businessmen while filling the national coffers. In last 60 years, the country has seen a spate of such schemes, all marketed as one-last-chance before the gates would be closed. Alas, this last chance keeps returning.
The new scheme has a slightly different marketing strategy. The Panama and Paradise Papers is the background, which has brought to fore significant assets held by Pakistanis abroad. The aim, therefore, is to induce them to bring this wealth in the country or at least declare it to the tax authorities. Two different types of tax rates would be applicable under the two regimes: the former at a higher rate (4pc) and the latter at a lesser rate (2pc).
What kind of immunities would be available is not immediately evident. In several statements reported in the press, it is stated that those declaring/bringing-back their wealth under the scheme would enjoy complete immunities under various tax laws, banking and financial laws as well as penalties under the penal code. Although, it is not yet clear, some groups have demanded similar amnesty for the residents also.
Before we examine the proposed scheme, we would briefly reflect on the history of amnesty schemes and their performance in achieving the intended objectives.
Nearly a dozen amnesty schemes have been designed since 1958. Until 2000, on average, a scheme was offered after every ten years. Typically, it would happen at the time of a major political change, such as in 1958, 1969 or 2000, each of which marked a military takeover. In recent years, the frequency has increased. The very fact that such schemes were periodically announced betrays the failure of successive schemes in achieving their objectives.
Despite having achieved significant progress in developing an AML/CFT regime in Pakistan, comparable to international best practices, FATF is not entirely satisfied by enforcement and implementation performance of Pakistan
The most celebrated scheme was designed in 2000 when the military government had just assumed power. There was an unprecedented commitment of the military to support the ideas designed by a cabinet of professionals and ministries of finance and revenue. In fact, the amnesty scheme was only a small part of larger reform, which, on the one hand, cleansed FBR (a huge purge of officers at senior level), and, on the other, launched a basic scheme of documentation of the economy at the grass roots level. The army officers volunteered to accompany survey teams for documentation. As soon as the traders’ class sensed a threatening taxation regime throwing a net around them, there was a massive push back. Strikes became a norm and eventually talks started between them and the government. The tax scheme that finally emerged was based on an ad-hoc assessment about the size of business and perfunctory GST and income tax liabilities were worked out without much documentation. The amnesty scheme did attract sizeable disclosures of assets, but did not mean much in terms of altering the revenue fortunes of the government. Thereafter, things starting drifting to new issues and focuses. Even the cleansing was termed as based on whimsical assessments rather than solid evidence of wrong doings. The extensive documentation was never released nor ever made any use of.
Curiously, the two democratic governments since 2008 have offered multiple schemes during their tenures. In 2008, an asset declaration scheme, at 2pc tax, only attracted Rs2.5 billion worth of assets. A bigger and bolder scheme failed to get the parliamentary approval. A side scheme for releasing customs duty evaded vehicles was also offered which attracted more than 50,000 vehicles.
The PML-N government has already offered three schemes. First, in December 2013, an amnesty was given to those investing in selected industries from asking their sources of investment (but not from any criminal liability) made until 2015. This had a limited scope and estimates of its success are not available. Second, the small-traders were offered a registration scheme in 2015 where their initial capital was exempted from disclosure of sources. The scheme was an utter failure, despite claims of traders’ leaders that at least a million traders would be registered. Third, to improve valuations in the real estate sector, a scheme was offered that would have valued properties on FBR determined values and would have attracted rates at 10pc, 7.5pc and 5pc for holding period of up to one year, two years and three years, respectively, and none for longer period. This has also not succeeded in eliciting significant declarations.
Viewed in this background, we doubt if the present scheme would meet any different fate than its predecessors. The following arguments support this conclusion:
First, the proposed scheme runs the risk of attracting immediate judicial scrutiny besides inviting adverse reaction from the international community. The chief justice has already called the key officials of FBR, SBP and SECP to inquire about their efforts into the wealth of Pakistanis held abroad. The proposed immunities are extensive and run counter to the principle of trichotomy of powers as held by the Supreme Court in the case of National Reconciliation Ordinance (NRO) 2007. If the wealth abroad has been earned lawfully, it doesn’t attract any penalty and hence needs no immunity from any penal liability. This leaves only such wealth that was either illegally transferred from Pakistan or earned abroad illegally. In either case, it is not merely a question of tax evasion but a number of other penal liabilities. It is doubtful whether parliament would have the authority under the constitution to frame a special law that endows the executive the authority to grant blanket immunities to offenders.
Second, the legal regime and the international environment prevailing today is markedly different than that prevailed when any major scheme was offered. For instance, the anti-money laundering and countering financing for terrorism (AML/CFT) regime instituted since 2010 has brought nearly all criminal offenses as predicate offenses to entail AML/CFT penalties. Initially, fiscal offenses, except smuggling, was excluded from the purview of AML, but in 2016, this exclusion was also removed. The scope of the proposed scheme would inevitably require immunity from AML obligations, which would be untenable.
Third, Pakistan is facing significant challenges at the Financial Action Task Force (FATF), a UN body, monitoring and enforcing AML/CFT regimes globally. Despite having achieved significant progress in developing an AML/CFT regime in Pakistan, comparable to international best practices, FATF is not entirely satisfied by enforcement and implementation performance of Pakistan. A FATF plenary is being held on 18th February 2018 in Paris that would be taking up Pakistan’s case that may lead to placing it under the grey list, which would be a setback to country’s efforts to preserve its ranking in the white list. Proposed scheme would be viewed with great suspicion and would weaken Pakistan’s case.
Finally, even the diluted schemes offered by the present government had attracted significant criticism from IMF, World Bank and FATF. The proposed scheme is likely to receive more noisy response from these platforms. Pakistan is a signatory to United National Convention Against Corruption 2005, which was ratified in August 2007. The scheme would also be violated of our obligations under this convention.
There are no two views that our tax system is broken and needs extensive repairs. Amnesty schemes, however, are no remedy. Documentation of economic transactions, broad-based use of technology, elimination of tax exemptions and withdrawal of presumptive tax regimes are the primary requirements to build a system that can capture the true tax potential of the economy. All this is a painstaking enterprise that cannot be short-circuited through one-off efforts like an amnesty scheme.