What’s wrong with the tax amnesty?

• The amnesty is nondiscriminatory

When Shaukat Aziz first became Finance Minister of Pakistan he, like his predecessors, was tasked to increase tax revenues. After six months in the job he observed, “There is a big credibility gap between the tax payer and the tax collector”. Successive governments have tried to plug that gap but succeeded in only widening it. The Amnesty Scheme has shown that the present government is no exception.

There is something seriously wrong with this hastily announced ill-considered tax amnesty. It is nondiscriminatory. It does not differentiate between legitimately earned money and earnings through kickbacks or illegal commissions. Nor does it differentiate between money earned legally abroad and money earned in Pakistan and sent illegally abroad. Thereby, it alienates thousands of legitimate taxpayers, particularly overseas Pakistanis.

We could attract billions in foreign exchange from overseas Pakistanis regularly by encouraging them to place their cash savings in foreign currency accounts in Pakistan

The Amnesty says that a significant part of the “local” economy remains undocumented and then goes on to tax “assets of any kind, domestic and foreign”, regardless of how acquired. Hundreds of thousands of overseas Pakistanis own assets abroad which have been legitimately acquired and which would be taxed in Pakistan if and when they return to their country. On the other hand there are many people who have never earned a cent outside the country, yet own foreign assets. The Amnesty does not care about the difference.

In fact the Amnesty discriminates against those holding foreign assets even if legitimately earned abroad. If someone has an undeclared local asset it will be taxed at one percent under this Amnesty, but if someone has a foreign asset, which he may have neglected to declare in time, it will be taxed at five percent. To add insult to injury, if the hapless person acquired that foreign asset 20 years ago, and was resident abroad for 19 of the last 20 years, his asset will be taxed at current market value. To make matters even worse, if he has a mortgage on his asset, it will be ignored in the tax computation. (While property mortgages are unknown here, most property abroad is bought with the help of mortgage loans).

Perhaps to discourage overseas Pakistanis from returning to Pakistan, the Amnesty requires all moveable assets (cash and investments) held abroad to be brought into Pakistan and invested in the failed Pakistan Banao Certificates after paying five percent declaration tax. It seems the government is not satisfied with foreign remittances from overseas Pakistanis.

Our annual imports are currently around $50 billion while our annual imports are only around $20 billion. More than half the gap is filled by foreign remittances which currently stand at around $18 billion. While some of the remitters are construction workers in the Middle East, many are highly paid professionals in the West. It is not hard to imagine that many of these professionals may want to return to Pakistan on retirement or earlier. If we encourage them to do so, the continuous benefit to the country could be measured in billions per annum. Assuming that around 100,000 overseas Pakistanis retire every year, if we could lure half of them to retire in Pakistan, each would bring in a few thousand dollars every month (to support his lifestyle). Instead the Amnesty tries hard to warn them off. Portugal, Spain and Greece, to name a few, are encouraging foreigners to retire in their countries by giving them tax breaks. We are doing the opposite.

In fact we could attract billions in foreign exchange from overseas Pakistanis regularly by encouraging them to place their cash savings in foreign currency accounts in Pakistan. We are willing to pay seven to nine percent on foreign loans, which come with many hard conditions attached, so why not give, say five percent on foreign currency non-resident accounts? Money from overseas Pakistanis comes without any conditions attached. All we have to do is for the SBP to make it easier to open nonresident bank accounts, and offer an attractive interest rate. But we must also promise not to entrap the overseas depositors in our unfair tax net and convert their foreign savings into rupees by coercion.