Meant for industrial revival?

PM’s investment package/amnesty scheme

The prime minister announced his investment package or the ‘Amnesty Scheme’ a few days back and I am being constantly asked to comment on the same. Although personally I am quite opposed to unconventional economic measures such as amnesty schemes, whitening opportunities, loan write-offs, etc, leaving my personal bias aside, let’s try and objectively assess this governmental measure. We can first start by listing the nature and ambit of this new prime minister’s investment package (as it is being referred to), followed by arguments on why governments should avoid launching such schemes, then going on to finding some sound rationale, if any at all, that could have possibly induced the PM into announcing such breaks, and finally listing an implementation model; meaning that if in the PM’s eyes such amnesties were truly unavoidable to rekindle the investment process in the country then what should he have done differently.

Describing it as a package that will promote growth and investment, Nawaz Sharif last week announced incentives for the industrialists or mainly traders – who are believed to be his traditional voters. The incentives offer the industrialists or traders to legalize their black money by investing in various projects. He also stopped the FBR (Federal Bureau of Revenue) from accessing the bank accounts of taxpayers and exempted a category of existing and all new taxpayers from tax audit. As desired by him, the FBR has now allowed the banks not to give any information about monthly transactions and written-off loans of those who either hold a National Tax Number (NTN) or are active taxpayers. In case, a person does not have an NTN and is a non-filer, it will be mandatory for all banks to furnish the FBR his monthly deposit statement, credit and payment details and any loan write-off. However, any such information will becomes useless when a person decides to file the income tax return and pay a minimum tax of Rs25,000 irrespective of what he owes to the exchequer. Further, the initial limit of Rs20 million per person per investment has also been removed and now under this scheme there is no limit to the investment you can claim as being exempt from scrutiny.

Post-2008 financial crisis the global economy per se is currently going through a very low growth cycle. However, one of the important lessons that come forth from this challenging period is that even in unprecedented low growth cycles the mature and developed economies tend to stay away from any such amnesty schemes. Their rationale being that amnesty schemes actually go on to be a reward for tax thieves and in fact tend to have the very opposite effect on the honest and legitimate tax payers. Just like loan write-offs to defaulters are considered to be unfair to people/businesses who instead fully discharge their debt liabilities on time, these whitening schemes likewise are also detrimental to a clean tax culture, since these schemes promote inequality and rent-seeking, disrupt a level playing canvas for businesses across the board, disturb the market equilibrium vis-à-vis competitiveness and supply chain management, and ironically aide the growth cum development of the un-documented sector in an economy over the documented one.

Further, even from the ‘good corporate governance’ perception and perspective, such messages can be extremely detrimental to an economy. Not only do such measures protect corruption, they also unleash a much broader negative impact by bringing the corrupt to the forefront of the national business scene and thereby discouraging genuine entrepreneurship & innovation. Finally, in a country like Pakistan where the tax base is quite narrow these schemes do little to promote legitimate businesses and on the contrary tend to be counter-productive and impediments to organized investment.

However, having said all this, Pakistan is going through one of its leanest investment periods (both domestic and foreign) in history. Pak Rupee is rapidly losing ground and our foreign exchange reserves are depleting fast. Naturally, Mr Sharif is worried – his mind must be racing back to October 1999, when the foreign exchange reserves (as today) had reached a precariously low level. It is neither surprising nor farfetched that ‘in the larger national interest’ a leader under such circumstances and stress allows his Machiavellian instincts to take over. Ethics and rules of business can take a back seat when it comes to the interest of state, which in this case would be protecting the economy!

Fair enough, but then extracting desirable results from undesirable measures requires competent management skills and sadly, this government from the very onset of its current tenure has been lacking in this department. The logical question that arises from this comment is that assuming this package was necessary then what differences in its formulation should have been made to make it comparatively more transparent and effective? The suggestions are as following:

• A timeline should have been attached to the amnesty. Meaning, the scheme should have a short time line of maximum 3 months, barred from being reintroduced or extended before a period of 10 years and a person claiming amnesty to only get his final assessment after consistently remaining in the tax net for a minimum period of say three years.
• The package should be accompanied by precise numerical targets of the government – meaning what it plans to achieve and in what time frame. The results should thereby be monitored by an independent body.
• The amnesty should have a decent price tag attached to it. Normally, such whitening schemes have a 10 per cent cost. Even the remittance window today costs between 5-6 per cent.
• Parallel incentives should also be announced for the existing cum honest payers, so that they are not discouraged or feel cheated. The package should incentivise being a taxpayer by announcing tangible benefits of having an NTN.
• Government should send a very clear message that once the deadline of this scheme expires, it will indeed come down very hard on the undocumented sector.
• Criterion of investment should be well defined and not exclude any sector – investment in any form and area is welcome.
• The package should encompass a vision on investment and be structured in a way that it promotes equitable growth, diversification and a balanced geographic spread of investment distribution.
• Last but least, since it is foreign exchange that we seek, the scheme should have a built-in conditionality that helps retention of foreign exchange in the country.

Finally, the timing of announcing such a package could not have been worse. With the IMF board meeting (where our loan package is to be finalized) scheduled in the 3^rd week of December 2013, and with most of the IMF inflows structured in 2014 and onwards, perhaps the government could have waited another three to four months. When you partner a financial institution to seek budgetary support, it is only fair to also keep them on board on policy decisions that can be perceived to undermine the very spirit of improving economic governance at home. And if it is industrial revival and investment that the government truly seeks then it would have been more appropriate to first undertake the long overdue micro level industry-operational reforms to unshackle businesses from the unnecessary and corrupt government oversight!

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