A power packed panel contributed to the well-attended & thought provoking seminar with insightful discussions. I was honored to moderate the panel discussion. There was a 100% positive feedback with requests for the session’s recording.
The participants included:
1. Ibrahim Kasumbi, Director & ex-SVP, Umair Petro Chemical & #KCCI
2. Adnan Mufti, Partner, Moore, Shekha & Mufti
3. Haider Ali Patel, Senior Partner, #EY Ford Rhodes
4. Omer Zaheer Meer, Managing Partner, MLCC & Chairman, MNP & #Tax Committee, ACCA & Member, Global Tax Forum
5. Sajjeed Aslam, Head of ACCA (Pak)
6. Zeeshan Shahid, Partner , #Deloitte Yousaf Adil
Be the first to watch the recording of this on the YouTube premiere on Wed, 24th June at 3:30 PM Pak Time (GMT+5)
This is a pre-budget program organized by #ACCA and been shared on the request of the members.
Mr. Omer Zaheer Meer represented #ACCA members & #Taxation Committee in the panel discussion & delivered a closing address after presenting the ACCA #Budget #Proposals. His professional profile can be accessed at: https://omerzaheermeer.wordpress.com/about
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Even
before Prime Minister of Islamic Republic of Pakistan, Mr. Imran Khan sat foot
on the US soil, his charm offensive began. Undoubtedly it was a difficult trip.
USA and Pakistan had grown apart over the years with the mistrust increasing by
the day. From Salala to Aafia to Shakeel Afridi to nurturing the “eternal
enemy” of Pakistan to siding with the Afghan Taliban, it was a downhill journey
filled with complaints by both sides. Trump took office, believing he can do
what none other could and make Pakistan dance to his tunes, even at the cost of
our national interests. As the time passed and the global geo-political
landscape started shifting, perhaps so did the advice he received and his
perceptions.
Still, it was the Pakistan that India was up against and mind you, India has the economic “might” and swayed USA to its ways. Narendra Modi spent over 2000 crores building a campaign of “global isolation” targeting Pakistan with all his political experience, “wisdom”, economic might and strategic alignment with USA.
Then, along came Khan and it all changed. He delivered for Pakistan what no Pakistani Prime Minister before him could, even in more conducive circumstances and he did it with dignity and poise.
Then, along came Khan and it all changed. He delivered for Pakistan what no Pakistani Prime Minister before him could, even in more conducive circumstances and he did it with dignity and poise.
The first master stroke was delaying the IMF program and strengthening ties with Turkey, Kuwait, China, Iran, KSA, UAE, e.t.c. showing the USA that Pakistan can survive sans its aid and influence and will only talk on equal terms without having to compromise on its national interests for peanuts.
The next
outstanding and brave move was to hold a public gathering in an arena in the
USA, something that no Pakistani Prime Minister had ever done. Indian Prime
Minister Narendra Modi did it with extensive resources and PR machinery. Khan
did it better without any of that. He took commercial flight with a small team,
stayed at Pakistan’s embassy and his party PTI organized the public gathering
on its own.
This was
not all. Khan used the opportunity brilliantly to pre-emptively counter the
narratives of the opposition by highlighting his anti-corruption drive back
home as well as his vision for a rising Pakistan. The results were astounding.
Trump in his meeting, wished him success for his anti-corruption drive and
couldn’t help but keep using the term “very popular leader” for him. Trump
seemed to have been trumped by Khan. The opposing narrative built carefully and
with the help of expensive PR firms died before it could even begin during this
trip.
Put
simply, Imran Khan won over the United States of America even before he and
Donald Trump spoke about the key issues facing both countries and laid the
groundwork for a proper and long-term bilateral relationship. In the words of
Adam Gerry:
In
a country (USA) that since 9/11 was programmed by the controlled news media to hate
Islamic Republic of Pakistan, in the same country where Islamic societies are
often misunderstood and in a country where arenas are usually filled with
sporting or music events rather than anything remotely political, Imran Khan
stole the show. Even if his rally was played for few seconds on America’s
notorious television news programs, this has been a great victory for Pakistan.
Because all it takes are a few seconds of footage from that Imran Khan rally to
change perceptions of Pakistan from one that is wholly negative to one that is
self-evidently optimistic and indeed one that is truly inspirational.
Prime
Minister Khan has done something for Pakistan that let alone his countrymen or
contemporaries, even the European allies of the USA find hard to do. He
conquered the heart and soul of America with his charm offensive coupled with
his dignity and topped up with his poise and sincerity.
Even
forgetting Khan’s confidence and poise or even wearing of the national dress of
Pakistan and the game-changing public gathering in USA, the way he put forth
Pakistan’s case and advocated for us all was heartening.
He was put
a tough question on Iran and handled it intelligently, keeping a balance and
pushing forward the case for peace in the region. Faced with the question about
3000 American deaths in Afghanistan, he reminded the world of over 70,000
Pakistani lives lost. Asked about Shakeel Afridi, he raised the issue of Aafia
Siddiqui just as he had promised to do.
That was
not all, faced with questions, planted to attack the institutions, he
brilliantly defended Pakistan. On the issue of PTM activists, he highlighted
the initiatives taken for FATA including the mainstreaming and the breach of
law by PTM activists. It was not just that he did it all without any paper
slips but that he did it in a manner which reflected his sincerity, confidence
and conviction. And these were what won over the Americans just like they won
over the Pakistanis.
Some
critics pointed out that he did not get any “money”. They’re right. Infact he
openly shared that he didn’t even ask for any aid but he won something much
greater for Pakistan. He won the respect of the global super power and the western
world with a seat for Pakistan on global stage ensuring Pakistan is both heard
and respected. And let me share, if handled properly, this foundation laid by PM
Khan during his maiden USA visit can lead to a dynamic and successful foreign
policy leading to long-term economic and trade benefits for Pakistan.
The writer is
a leading economist and experienced tax expert who holds five top professional
finance, investment and accountancy qualifications CFA
(USA), CPFA (UK), FCCA (UK), CA (ICAEW) & Anti-Money
Laundering specialization along-with substantial international exposure and
represents Pakistan on Global Tax Forum while sitting on the boards of several
think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about
Continuing from the last week, Allama Muhammad Iqbal, the sage of the nation, further pointed out the key problems as well as their workable solutions as outlined below:
5. Opportunity Cost
In economics the opportunity
cost is the cost of the opportunity lost in order to avail another one. For
example if we build a plaza on an agricultural area where we could alternatively cultivate wheat, the
opportunity cost of building the plaza would be the lost production of the
wheat for the foreseeable future which we could have alternatively done and
made use of. This needs to properly considered in all economic decisions. It’s
good to see that PM Imran Khan has taken a leaf from Iqbal’s philosophy and
incorporating that within the construction bye-laws prohibiting construction on
agri-lands, hence accounting for the opportunity costs regarding food safety.
6. Austerity
Pakistan is caught up in the crisis of underdevelopment in the
face of vast unlimited resources. One important strategy to adopt as per Allama
Iqbal is austerity, as a guiding inflexible rule to allow resources to go into
economic construction. Iqbal was a great champion of this cause and recommended
it time and again. This, besides other factors help in building public trust.
PM Imran Khan also champions this idea to build public trust.
7. Land Reforms
Iqbal didn’t shy away from the controversial topic of land reforms
either. Infact, he backed these reforms to facilitate the oppressed class of
peasants. It will be a befitting tribute to the memory of Iqbal if we develop
an equitable system of agriculture in which the cause of peasants is well
looked after for ensuring social justice for the peasants and for making a
major break-through in boosting agricultural production.
Iqbal argued for radical reforms arguing that land as a means of
production should be owned by the society for the benefit of all. “al-Ardu
Liliān” (“The Earth is God’s”), is a poem in Bal-i-Jibril, which
sums up this idea about land ownership.
در خدایا!
یہ زمیں تیری نہیں، میری نہیں!
تیرے آبا کی نہیں، تیری نہیں، میری نہیں!
(To God, this land is not yours, nor mine,
Not thy ancestors’, not yours, nor mine)
” If these core elements of Iqbal’s economic philosophy are properly implemented, there is no reason why Pakistan cannot progress on the path of economic prosperity “
8. Rural Development
Iqbal also argued that the development of rural areas is at the
heart of the economic and social development of a country. He analyzed that it
does not only mean agricultural growth but it’s also about improving of the
economic and social conditions of the rural population by way of rising incomes
and providing them with necessary amenities like good houses, paved streets,
water supply and sewerage, health services, education, roads, power,
communication,’ etc.
9. Industrial Development
The cause of industrial development was very close to Iqbal’s
heart. He considered the development of industries essential for mitigating
the curse of unemployment. On many international platforms there were talk of
indigenous technology during his era, which are now wrongly associated with
Mahatma Gandhi. The historical fact is that Iqbal was the author of this
concept at the time. Examine the excerpt below from one of his speeches:
“We spend practically nothing on industry. And as I have said
before and as many other speakers have pointed out, industrial development
alone can save us from the curse of unemployment. There is a good future for
weaving industry and for shoe-making industry in this province and if we
encourage these industries, I think we shall be able to save the province from
unemployment, provided we protect these industries against Cawnpore and
Ahmedabad.”
10. Skilled Workers
Iqbal was unequivocal on this
issue. He said that Muslims must take to industry and craftsmanship. “In
my eyes,” declared Iqbal, “the hands of a carpenter, rough and coarse
due to the constant use of the saw, are far more attractive and useful compared
to the soft and delicate hands of a scholar, which never carry more than the
weight of a pen.”
11. Global Exploitation
Furthermore, Iqbal had also analyzed protective
trade tariffs and global economic exploitation of weaker nations by the
stronger ones. His
couplet below depicts his state of mind regarding the exploitative attitude of
the Western economies and his dreams for the economy of Pakistan:
دیار مغرب کے
رہنے والو خدا کی بستی دکاں نہیں ہے
کھرا جسے تم سمجھ رہے ہو وہ اب زر کم عیار ہوگا
(O, Residents of the West! God’s earth is not a shop;
The gold you think to be genuine, will now prove
to be debased)
To
sum it up, the key principles of Iqbal’s economic model are as below:
Having
strong bond of trust between the state & citizens (core issue of Pakistan
particularly in the context of the revenue collection agencies).
Human
Capital & Human Development (which is a key with the present youth bulge in
Pakistan).
Interest
Free Business Eco-System (this warrants a detailed writeup but Akhuwat’s model
is something we can begin with as a recent success story to replicate,
beginning with pilot projects).
Poor
Centered Policies (inclusive economic policies resulting in justice and peace
which in turn produce a conducive business environment leading to economic
upturn).
Self-reliance
which is the core of Iqbal’s philosophy and economic model.
If these core elements of Iqbal’s economic
philosophy are properly implemented, there is no reason why Pakistan cannot
progress on the path of economic prosperity. How can that be done and where to
begin with are the concluding areas we’ll
discuss in the last part of this series.
The writer is
a leading economist and experienced tax expert who holds five top professional
finance, investment and accountancy qualifications CFA
(USA), CPFA (UK), FCCA (UK), CA (ICAEW, UK) & Anti-Money
Laundering Specialization along-with substantial international exposure and
represents Pakistan on Global Tax Forum while sitting on the boards of several
think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about
Allama
Muhammad Iqbal is known to us as a marvel of excellence in all the fields he
worked in. He is the visionary who dreamed of Pakistan, the famous Poet of the
East, a top philosopher, a revered scholar, a politician, a parliamentarian par
excellence and even a spiritual guide for many. Thanks to the recent pioneering
work published in the book of my honorable father Mr. Zaheer Ahmad Meer
Advocate, titled “The Great Lawyer – 106 Reported Cases of Allama Muhammad
Iqbal”, we’re now aware that he was a Great Lawyer too.
However,
what most of us may be unaware of, is the fact that he was also a fine
proponent of economics. He wrote his first book on Economics titled “Ilm ul Iqtisadiyat”
or “Science of the Economics” in 1903 in Urdu, at the age of just about 26
years old, when no one was doing such work even in English in the sub-continent.
Unfortunately, this first ever book on economics
in Urdu language, largely remained unnoticed, not to be realized, never to be
properly acknowledged.
Let us remember that during Iqbal’s era, the classics of Adam Smith, John Stuart Mill, Ricardo and Alfred Marshall were taught all over Europe. But in the Indo-Pak subcontinent even teachers and scholars had only a hazy idea of this subject. Actually, it was not even introduced at the University level anywhere in the Indo-Pak subcontinent baring three universities.
” Unfortunately, this first ever book on economics in Urdu language, largely remained unnoticed, not to be realised, never to be properly acknowledged “
It is therefore spellbinding that Iqbal had such
deep insights into the subject of economics and the economic plight of the
Muslims of the sub-continent. He was deeply concerned with the unequal income
distribution that turned the rich richer and the poor poorer, a challenge we
still face across the globe and in our homeland, Pakistan. The mere writing of
‘Ilm ul Iqtisadiyat’ renders him economist in the same-way as the Wealth of
Nations (1776) made Adam Smith an economist, or the Das Captia portrayed Karl
Marx as one; albeit the context eventually differed.
Iqbal also pointed out on 28 May I937 that: “The
problem of bread is becoming more and more acute. The Indian (Muslim) has begun
to feel that he has been going down and down during the last 200 years.
Ordinarily he believes that his poverty is due to (Hindu) money-lending or
capitalism. The perception that it is equally due to foreign rule has not yet
fully come to him. But it is bound to come.”
Allama
Iqbal, the learned enigma and a great thinker of Islam, was actually the first
economist of the Indo-Pak subcontinent to raise his voice against the
exploitation of Muslims by domestic and foreign classes controlling the means
of production.
While,
Dr. Muhammad Iqbal was anti-Imperialism in his thought process, yet he was able
to point out the key problems as well as draw up workable solutions to address
them.
1. Welfare based wealth
Iqbal
presented the concept of welfare based wealth, distinguishing it from the
traditional wealth. An example to
elaborate the concept would be that if skilled labor were enslaved for forced
labor, it’ll increase the national wealth but will be detrimental to the
welfare based wealth of the citizens and wider humanity. Similarly a pledged
property may be accounted for as the wealth of the creditor in the event of a
default but won’t meaningfully impact the overall wealth of the state.
2. Population Control
Surprisingly,
Allama Iqbal also pointed out the excessive increase in population as a core
issue at times of saturating economic resources, in an era when no one in the
Islamic world did that. He very logically explained that while increase in
population can be productive in a scenario of untapped or plentiful economic
resources, it becomes counter-productive economically when the situation
reverses, unless, other economic avenues can be explored to further create
economic opportunities for growing population.
We
can all appreciate, how this issue identified in 1903, has become a core
economic concern for us in 2019, albeit 116 years later. I ask you all, what
else do you call vision & foresight, if not this?
3. Economic Equilibrium in
local context
Iqbal also advocated that a research-based
analysis can determine the equilibrium in various sectors of the economy and
modes of factor pricing as per the local context. Yet, at the same time he also
urges to focus upon human development through exploration and preservation of
natural resources and improving human and societal relations. By doing so,
Iqbal practically envisioned today’s HDI (human development index).
4. Specialized
Production/Services
Iqbal has also put forth various strategies used
by recent economic success stories. For example, he discussed regional
specialization in producing goods and services and brought in the notion of
comparative cost, concepts that China practiced in its economic resurgence. This
basically advocates for a country or its federating units, e.t.c. to focus its
expertise in their specialzied area of production/services while accounting for
the opportunity cost of producing that good or service in order to achieve
economic optimization.
The writer is
a leading economist and experienced tax expert who holds five top professional
finance, investment and accountancy qualifications CFA
(USA), CPFA (UK), FCCA (UK), CA (ICAEW, UK) & Anti-Money
Laundering Specialization along-with substantial international exposure and
represents Pakistan on Global Tax Forum while sitting on the boards of several
think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about
With the deadline for declaring undisclosed assets, sales and expenditures under the Asset Declaration Ordinance, 2019 (commonly referred to as Tax Amnesty scheme) being over, it’s time to analyze the results, experiences during the process and the follow-up required.
Asset Declaration Ordinance,
2019 was promulgated on 14th May 2019. The stated aim of the
initiative was to bring new people, previously unregistered, within the tax-net
voluntarily. The initial response just like the 2018 Tax Amnesty scheme was
lukewarm, perhaps owing to both the lack of clarity and the Ramadan and Eid
festivities.
Initiatives that showed
intent
Thankfully, following our
advice, the concerned quarters ran public information campaigns and announced
that they had successfully integrated databases
of various authorities in the country and now also possessed the information
gained via OECD multilateral convention about Pakistani residents’ offshore
accounts and are further strengthening the mechanism to launch a compliance
drive immediately following the amnesty. An adjudication authority for
enforcement of The Benami Transactions (Prohibition) Act, 2017.
This, after a lapse of almost two years since the law
came into being, signaled the seriousness of the government for enforcement
action.
The scheme, however, really took off in the last ten days of June 2019 with the seriousness of the Government in enforcement becoming even more clearer and the arrests of top political figures by NAB and stringent sentence in corruption case of ex bureaucrat by the Supreme Court of Pakistan sending strong messages.
“The promised enforcement action coupled with structural reforms to eliminate taxpayers’ harassment and to rationalize the tax system should be undertaken. Without these measures, this scheme would be remembered as just another one in the history of the amnesties launched in Pakistan. However, with the right approach and actions this can become the turning point for the taxation compliance culture in Pakistan”
Moves that backfired
NADRA and FBR then tried to
further shore up these efforts by launching their databases. NADRA launched its
database first with initially a fee of Rs. 500 to access the records of a
person held by NADRA. Unfortunately, it was a disaster due to the lack of data
and the people were taken aback that if this was the data held by the
authorities then nothing much has changed. The move backfired big time. Many
people started talking of taking a “risk” believing that the claims are a
façade.
Next came the FBR database,
free to access. The quality of data was better than NADRA’s database but was still
very weak. However, FBR atleast did the sensible thing of posting a message
that it was not a complete profile and that the details were still being
populated from the database. A rumor was also spread claiming that whoever
logged in to the databases would be recorded and followed up by the FBR. This
negativity infact saved the day with people starting to avoid checking their
profiles and simply preferring to avail the scheme to streamline their affairs.
Experiences and Challenges
Despite these setbacks, most
of the people, including those belonging to the powerful segments as retired
military officials, bureaucrats, judges, journalists, e.t.c. were flocking to
avail the scheme. Just a clarification that the bar on Government employees’
being excluded from the scheme was for those currently serving or retired
within the last 10 years.
With the results showing
healthy signs and uniform demands of an extension from all professionals, tax
practitioners, legal fraternity, chartered and chartered certified accountants,
businessmen, e.t.c., the Government did the best it could in the face of the
IMF pre-conditionality of no Amnesty scheme during their program, which was an
extension of 3 days, till 3rd July 2019. The response erupted!
People were literally
running from pillar to post to avail the scheme in the last few days which led
to regular breakdown of the online system of FBR (IRIS). With extreme load on
the last day, the system constantly got choked. Furthermore, a confusion led to
the rumors of the systems being partially shutdown at 5 PM on 3rd
July 2019 instead of the usual tacit understanding of the English calendar’s
end of day at 11:59 PM, in line with the past practices of the FBR. This led to
atleast 6,000 applications of the already paid tax being stuck in the system
with tens of thousands not being able to submit. Mr. Shabbar Zaidi, the FBR
Chairman, allowed the processing of the former while the fate of the latter
remained unclear to this moment.
The Results
Despite all the challenges, the scheme became the most successful in terms of the numbers availing the scheme and the new tax registrations being issues. At the time of publication, 137,000 people had availed the scheme compared to 84,000 over a much larger duration in the 2018 amnesty scheme. Out of the 137,000, almost 100,000 were new tax registrations. With the stuck cases being cleared, the number is expected to grow from 137,000 to closer to 150,000. Almost $ 20 billion worth of previously undisclosed assets were declared. However, the tax collection was less compared to the 2018 scheme owing to the low rates of this scheme (1.5% – 4% for most asset classes) compared to the last one’s 5%.
Way Forward
The challenges faced during this scheme should be
studied, and lessons learned for the future particularly about the capacity
building of the state institutions both in terms of the human resource and the
technology. The promised enforcement action coupled with structural reforms to
eliminate taxpayers’ harassment and rationalize the tax system should be
undertaken. Without these measures, this scheme would be remembered as just
another one in the history of the amnesties launched in Pakistan. However, with
the right approach and actions this can become the turning point for the
taxation compliance culture in Pakistan.
The
writer is a leading economist and tax expert who holds five top professional finance,
investment and accountancy qualifications CFA (USA), CPFA (UK), FCCA (UK), CA (ICAEW,
UK) & Anti-Money Laundering
Specialization along-with substantial experience and represents Pakistan on
Global Tax Forum while sitting on the boards of several think-tanks. His
profile can be accessed at: https://omerzaheermeer.wordpress.com/about
With the ongoing budget debate, there is increased focus on the need for fiscal discipline and reforms to be achieved chiefly by a turnaround in the taxation system of Pakistan. Generally speaking, taxation laws are set of laws to derive revenues for the Government to function & service the citizens with the aim of improving their quality of life while continuously improving the facilities and infrastructures provided.
“Winning the confidence of the masses, removing the fear of harassment and changing the ill-repute of the FBR are the biggest challenges. Without these, no reforms can work to achieve the full potential of our taxation system“
Pakistan has
a complex taxation system with a focus on indirect taxes with over 70 different
taxes. This has led to several sets of laws dealing with specific taxation areas.
Below are some major issues in dire need of major reforms to achieve our
taxation potential:
Extremely Low Numbers of Income
Tax Returns Filers:
From approximately 3.5 million income tax returns filers to just
above 1.4 million for the (last complete) tax year 2017 with a filing deadline
ending in 2018, this is an area of major concern. The filing for tax year 2018
is still ongoing. In a country of over 220 million, this amounts to just 0.6%
of the total population and is troubling.
Some steps have been proposed in the budget 2020 to address
this challenge including requirement to register for tax after undertaking some
transactions and the duty of the FBR to register those who paid withholding
taxes but are not registered for NTN using the data to compute the imputed
income.
Undocumented, Black economy:
This builds up from the above issue of low return filers. A
larger proportion of the economy, some estimates put the number close to 100%
of the GDP, is believed to be undocumented black economy. This by any standard
is massive and a point of major concern. Low literacy rate, a fearful
reputation of FBR, low public service delivery and rampant corruption are
amongst the major reasons for this massive level of black economy.
The steps proposed in the budget to counter this include the
key move to require any property transaction over 5 million to be done through
banking channel otherwise hefty penalty and tax losses would be incurred.
Taxation Complexities and Ease of
Doing Business:
As
mentioned above, Pakistan has a very complex taxation system and as per the
data by the World Bank, has placed the country on 136 which though an
improvement from the ranking of 147 out of 190 countries,
is still worrying. The complex, non-harmonized and multi-layered laws in
operations not only make it more expensive but also time-consuming for the
businesses.
Registering
a business for taxation particularly sales tax is a very complicated and HR
driven in this age of technology and when we already have databases and systems
like IRIS and STRIVE in operation by the FBR. Steps needs to be taken to
automate and facilitate these processes.
Harmonization Issues:
The
issue of lack of harmonization among various taxation laws has increased
many-fold post the devolution of Sales Tax on Services regulation and
administration to the provinces and each Province setting up its own Revenue
Authority for the same, as a result of the 18th Constitutional
Amendment. In an era, when countries are agreeing to facilitating arrangements
on the likes of European Economic Area, making borders irrelevant in terms of
economic activities, Pakistani businesses are facing the challenges of a gone
era while expanding their businesses in other provinces within the same
country. The regulations are as if these are not the provinces of one country
but different countries sans economic treaties.
There
needs to be harmonization between various provincial taxation bodies among
themselves as well as with the FBR on various issues particularly that of
jurisdiction and tax adjustments. This should also lead to rationalization of
tax laws in a harmonizing manner.
High Costs of taxation:
In
addition to having one of the most complex taxation systems in the world,
Pakistan also has high taxation rates compared to other countries in the
region. This adversely impacts the investment climate and business eco-system
in the country.
Furthermore
the taxation rates are also several times that of the cost of tax avoidance in
the country, making it an attractive proposition for some businesses to keep
operating beyond the radar of the legal economy.
Moreover,
the highly complex nature and high-handedness of the taxation regimes also
translates into further costs for taxpayers in terms of the time and
administration required to ensure compliance. Even from a pure business
perspective, this makes tax avoidance an attractive proposition keeping in view
the weak and slow judicial system.
Structural Issues:
The
structural issues including confusing and highly subjective taxation laws,
focus on indirect taxes, the ancient systems, mal-practices, singular focus on
revenue collection, harassment of the existing taxpayers rather than using the
same resources to focus on expanding the tax base and a general ill-perception
have all contributed to the current state of affairs and needs to be reformed
if the situation is to improve.
Winning
the confidence of the masses, removing the fear of harassment and changing the
ill-repute of the FBR are the biggest challenges in this regard. Sans these, no
reforms can work to achieve the full potential of our taxation system.
Conclusion:
The
above issues require serious efforts to address the critical issues concerning
the taxpayers particularly the businesses in the country. With CPEC and its
associated possibilities materializing, now is a good time to ensure these
reforms are put to action to achieve the full potential of not only the
existing economy but also the developments accruing. We’ve been discussing the
possible proposals for reforms and share more in the next issue. Till then, we
leave our readers to ponder over this topic.
The writer is a leading economist
and experienced tax expert who holds five top professional finance, investment
and accountancy qualifications CFA (USA), CPFA (UK),
FCCA (UK), CA (ICAEW, UK) & Anti-Money Laundering Specialization
along-with substantial international exposure and represents Pakistan on Global
Tax Forum while sitting on the boards of several think-tanks. His profile can
be accessed at: https://omerzaheermeer.wordpress.com/about
In
a pre-recorded message released on social media and elsewhere, the Prime
Minister Imran Khan, while addressing the nation said that only 1% out of the
220 million Pakistanis bear the burden of taxes. He painfully shared that the
nation is suffering, as many are not fulfilling their lawful duties and paying
their due share to the State. PM Imran Khan also shared that the institutions
now have information and are constantly getting more, implying that they have
also developed the mechanism to identify and followup the tax evaders. The PM concluded by saying that this is the
last chance to avail the recently launched tax amnesty till 30th
June 2019 and sleep peacefully while also contributing to your nation. The
spirit of the message is right.
Changing
Times:
The
times are surely changing for the taxation landscape in Pakistan with
transnational cooperation from organizations such as OECD (Organisation for Economic Co-operation and Development), newer laws being enacted such as the Benami Act and the technology
shaping the data-driven focus of the tax machinery.
What
used to happen in the past was that either people used to connive with some
corrupt officials or simply stay out of the tax net willfully to avoid full
disclosure of their actual wealth, sales, expenses, e.t.c., while accumulating
assets in their own, their family or trusted or controllable third party’s
names. While this was very common, some people would simply behave in a similar
manner due to ignorance of the laws and the resulting implications. This used
to result in both the tax evasion as well as mis-declarations with often the
use of benami transactions. The FBR, unfortunately, neither had the capacity
nor the information to detect and/or take any penal action. Hence there was not
much to worry for such people and they believed it was easier and perhaps “better”
to continue with such practices. These notions stand to fail now.
Possible
Nightmares:
Imagine
this. You bought a good expensive property for your son or daughter in a posh
area, perhaps Bahria Town Karachi or DHA Lahore. One day, you get the news that
this same property led to the arrest of your beloved kid and the confiscation
of the property. How would you feel?
Or
alternatively imagine your father being arrested in front of you for not being
able to justify the money trail of your hard earned empire. Or that loyal
servant of yours being taken away for holding a benami for you while the
property is getting confiscated, atleast partially. Nightmares? Yes. But the
good news is that you can save yourself from all these and other troubling
possibilities at a fraction of the cost that you may have to incur otherwise in
such instances.
So it is only logical to avail the “Tax Amnesty” to both serve your interests as well as those of the country and be able to sleep peacefully as the PM told us.
Information, Capacity & Technology :
Pakistan
is already receiving information courtesy of the OECD collaborations about the
foreign properties, bank accounts and other assets of the Pakistani residents.
Multiple FBR Chairmen in the past, have also claimed to have database of three
to four million people without an NTN (national tax number) but enjoying a
lavish life style with multiple foreign trips and/or assets in their name. As
if this wasn’t sufficient, FBR has over time acquired the data as a result of
the withholding tax regime. Last but not the least, the coordination between
FBR, NADRA, FIA, e.t.c. is bound to make life difficult for the willful tax
evaders as well as the ignorant culprits once the relevant drive is started.
Political
Will & Penalty Provisions:
Chairman
FBR has already shared his intention to launch a drive to catch tax evaders and
mis-declarants post amnesty deadline of 30th June 2019. State
Minister for Revenue, Mr. Hammad Azhar had shared about the integration of
various databases which will certainly be used for such a drive. This is also
supported by the fact that due to the filer/non-filer differential taxation
regime and the withholding regime a lot of the data regarding immovable
properties and other assets is already received by the FBR. It’s not like the
past when the Federal Board of Revenue struggled for the data.
To make matters more “interesting” for tax evaders, the FBR issued the Benami
Transactions (Prohibition) Rules 2019 on 11th March 2019. With
this, the Benami Transactions (Prohibition) Act 2017, came into force.
The practice
of holding benami property — moveable or immoveable — plays a significant role
in enabling tax evasion, money laundering and terror financing.
This law
entails strict punishments for persons entering into benami transactions. Any
person found guilty of the offence will be punishable with rigorous imprisonment of at least one year, which may extend to
seven years, and a fine of up to 25 per
cent of the fair market value of the property. The Income Tax Ordinance 2001, already contains severe punishments for
mis-declarations and/or tax fraud which can range from heavy penalties to prosecution.
The
Misconceptions:
A common misconception is that paying taxes and then
buying a benami assets would be fine. Not paying taxes is one offence and
holding a benami asset is another offence.
Another
wrong notion held by many is that if you’re not
earning taxable income or if your tax is already been deducted you do not need
to hold an NTN or file your tax returns. They’re both wrong.
You
have to get an NTN and file your return even if you don’t have a taxable income
but own immovable property with a land area of two hundred and fifty square
yards or more or owns any flat located in areas falling within the municipal
limits existing immediately before the commencement of Local Government laws in
the provinces; or areas in a Cantonment; or the Islamabad Capital Territory or
even own a motor vehicle having engine capacity above 1000 CC or even have
a commercial or industrial connection of
electricity where the amount of annual bill exceeds rupees 500,000.
There
are thousands of property owners in each of the major housing societies such as
DHA, Bahria Town and many other private ones in the major urban centers. How
many of them have declared their affairs and even those who have, how many of
them have the proper paper trail? All of them would be liable to punitive
action under the above laws.
Your
Last Chance:
Keeping in view of the above facts, the pressures on the national exchequer, the international and local collaborations and technological tools to use data analytics and the will of the Government to enforce the law, all these indicate that it is in the best interests of those who either because of being unaware of the law or even willfully, were in breach of the laws, should take this “golden” opportunity to avail the “Tax Amnesty” offered by the Asset Declaration Ordinance, 2019 whereby they can “whiten” their wealth, undeclared sales, expenses and/or the benami assets for as little as 1.5% only. Compare this to the potential tax and penalty costs which can be as much as 25% – 50% of the property value alongwith upto seven (7) years of rigorous imprisonment. So it is only logical to avail the “Tax Amnesty” to both serve your interests as well as those of the country and be able to sleep peacefully as the PM told us.
The writer is a leading economist and tax expert who holds five top professional finance, investment and accountancy qualifications CFA (USA), CPFA (UK), FCCA (UK), CA (ICAEW, UK) & Anti-Money Laundering Specialization along-with substantial experience and represents Pakistan on Global Tax Forum while sitting on the boards of several think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about
To learn more about the amnesty or obtain professional advise: http://www.mlcc.pk Call: 042-37242434 / 042-37242612 Email: ozmeer@mlcc.pk
Taxation is an extremely important source of funding for any state to finance the running of the Governmental functions. Even the oil rich Arab states recognized the importance of this and started to shift towards a lasting economy with citizens contributing to the national treasury with their share of the taxes. To put it simply, in all global economies, there is both direct and indirect taxation (in different combinations). Direct taxation is a tax directly levied on an individual or institution’s income while indirect taxation entails taxes on products and services whereby consumers are made to pay taxes when they consume these.
Taxation is therefore an essential subject warranting attention from all concerned. In this write-up we’ll identify key issues in this regard and propose solutions to solve them amicably which have been presented by this writer at various think-tanks and as Chairman of taxation committees of key professional bodies such as ACCA. These have been published and publicized but unfortunately still awaiting implementation by the decision makers.
In developed countries, realizing that taxation is necessary for providing them with necessary facilities, most citizens contribute their share to the state finances. The situation is different in developing countries, being marred with corruption and mismanagement; there is a lack of public trust by the masses demanding evidence of delivery before they’re willing to pay their due share. As if that wasn’t enough the subjective nature of taxation laws resulting in harassment and the structural tilt towards indirect taxation further erodes the confidence of the populace in the taxation system.
With all the natural resources at our disposal, a high proportion of population being young and hardworking and with cheap labour availability, a fairer system of taxation culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan
As a result of the above, the unresolved challenge faced by Pakistan on the taxation revenue shortfall front isn’t that surprising. A culture of tax avoidance has long engulfed the business horizons. An ongoing cat and mouse fight between the tax authorities and the taxpayers, with the later believing that it would be a waste to pay off their tax bills due to the deep pockets of the corrupt government officials, harassment emanating from the taxation system and/or lack of public services. The FBR officials, on the other hand, feel overwhelmed and underappreciated with issues of career paths, promotions and understaffing.
While the FBR officials rightly point out that no state can perform the necessary duties with the empty coffers, the tax payers also strongly put forward the argument that they don’t see any real delivery of essential services but instead are greeted with stories of herculean corruption rife all around coupled with undue persecution once they enter the tax net. Hence, there seems to be a massive break-down of trust between the taxpayers and the “tax-man”.
This serious trust deficit in Pakistan has lead to a difficult situation where finance ministry overemphasizes on indirect taxation to try to bolster its coffers. Unfortunately this approach has serious negative ramifications for Pakistan’s economy and people which has manifested in worsening the already declining economic situation of the country.
Another misconception is that since only 0.66% of the total population files their income tax returns, hence majority of the people do not pay any taxes. On the contrary, Pakistanis are taxed indirectly on just about everything. However, this way of collecting taxes indirectly leads to a regressive system where those earning more pay a lower proportion of their income as taxes and it results in inflationary pressures within the economy as the increased costs translates into increased prices for just about everything including the commonly used commodities. The effects are hyper-inflationary in nature because there is a multiplicative rather than an additive element in the inflation passed-on at every level.
The mess created by the taxation policies pursued by the previous governments needs to be undone. What is critical to achieving the success in taxation reforms is to restore the faith of the taxpayers by implementing a multi-dimensional tax reforms agenda, where:
The biggest harassment tool of the “fishing” audits should be eliminated. Instead the audits should be limited to the cases where either there is specific information and/or the taxpayer is taking some benefit from the state such as an exemption or refund.
An alternate can be the introduction of an incentive based system introducing an option of no audit in case of payment of 25% higher tax compared to last year. Such measures have proven to be success in the past.
Focus should be shifted on using e-systems like “STRIVE” for verification of withholding taxes and their deposits in the treasury.
Issues of FBR such as under staffing, lack of full automation and career prospects along-with just compensation should be properly addressed.
Taxpayers should be facilitated by making the processes easier and fairer, focusing on maximum automation in order to stem out corruption.
Instead of increasing the tax rates the tax net should be constantly widened.
More focus should be given to direct taxation, with more affluent contributing more to the treasury.
Meaningful tax rebates and reliefs should be introduced for the less able sections of the society.
Certain exempt sectors should be brought into the tax-net (subsidies can be given for assisting any under-pressure areas).
Tax rebates and incentives should be focused to encourage foreign/local investments in key sectors with tax-breaks for transfer of technology, e.t.c. as may be required in a particular sector.
Tax money should be seen to be actually spent on public welfare and infrastructure projects, which will improve the spending capacity and the business environment in Pakistan.
The massive corruption in public contracts/projects, now routinely in the range of 20-40% of tender values, should be eradicated for better and efficient use of public money through revamping the pay and accountability structures.
With all the natural resources at our disposal, a high proportion of population been young and hardworking and cheap labor availability, a fairer system of taxation culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan.
The key reforms outlined above, if properly implemented, can resolve the current enigma facing the treasury. Should such reforms be made with reliance on local resources and a will for change, there is no reason, why Pakistan cannot stand on its own feet and become an economic hub not only for the region but the whole world.
The writer is a leading economist and tax expert who holds five top professional finance, investment and accountancy qualifications CFA (USA), CPFA (UK), FCCA (UK), CA (ICAEW, UK) & Anti-Money Laundering Specialization along-with substantial experience and represents Pakistan on Global Tax Forum while sitting on the boards of several think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about
The first ever and one of the more successful tax amnesty schemes in Pakistan was launched during Ayub Khan’s era in 1958. It resulted in a collection of approximately PKR 1.12 billion which equaled to US $ 0.24 billion approximately and around 71,289 people came within the tax net by making declarations. General Yahya Khan also launched a tax amnesty scheme in 1969 but ended up adding only 19,600 taxpayers with declared assets of just PKR 920 million. Zulfiqar Ali Bhutto’s tax amnesty in 1976 saw the number of people declaring assets decline drastically with assets worth only PKR 270 million declared. The scheme by General Zia’s government was a disaster. The PMLN government’s tax amnesty scheme in 1997 could add assets of PKR 141 million only.
In 2000 General Musharraf’s amnesty resulted in assets declaration of $3 billion approximately and has been the most successful one in terms of revenue collection. Prior to this, in the three tax amnesty schemes by PML- government, only 128 people declared their assets. Later on, PMLN’s 2016 tax amnesty saw just 10,000 declarations and a meager PKR 0.85 billion declared. However, the 2018 amnesty by PMLN was able to garner closer to a $ 1 billion but didn’t result in any significant change in the tax compliance culture. This shows that the disease of tax evasion and the curse of black money has been engulfing Pakistan since its early years.
Recently, there has been a lot of hue and cry over the Assets Declaration Ordinance, 2019 by the Pakistan Tehreek-e-Insaf Government that is commonly referred to as the “Amnesty Scheme”. The opposition has termed this as an opportunity for the near and dear ones of the Government to whiten their “black monies” which is factually incorrect as the political office holders and those related to them are barred from this scheme. Similarly, the opposition is also claiming it to be a copy of the amnesty scheme introduced by PMLN. As a result of these accusations, there is a lot of confusion as to what exactly is this scheme, is it any different from the last one by PMLN Government and whether it can help the stated objective of helping in the widening of the tax base. Let us briefly examine these questions in this write-up in an objective manner.
Overview of the Assets Declaration Ordinance, 2019 (The Amnesty):
The above titled ordinance has been promulgated allowing undisclosed, unreported and/or under-reported assets, sales and/or expenditures upto 30th June 2018 and/or the “benami” assets acquired or held on or before the date of declaration to be legally declared for the payment of very low “taxes”.
The Scope is clarified in the section “3” of the ordinance as below:
“Subject to the provisions of this Ordinance, any person may make, on or before 30th June, 2019, a declaration only in respect of any—
undisclosed assets, held in Pakistan and abroad, acquired up to 30th June, 2018
undisclosed sales made up to 30th June, 2018
undisclosed expenditure incurred up to 30th June, 2018; or
benami assets acquired or held on or before the date of declaration;”
“The Prime Minister still enjoys tremendous trust in his personal integrity and also retains his charisma, but the general atmosphere of uncertainty is severely damaging”
Important Conditions for the Declaration
Any cash held in Pakistan which is to be declared will have to be deposited into the declarant’s bank account(s) and kept in the account(s) till atleast June 30, 2019.
Any foreign liquid assets repatriated to Pakistan under the scheme are required to be deposited into declarant’s own bank account(s) locally or invested in Pakistan Banao certificates or any foreign currency denominated bonds, issued by the Federal Government.
Any foreign liquid assets declared but not repatriated back to Pakistan under the scheme, in addition to being taxed at higher rate, must be deposited into the declarant’s foreign bank account(s) on or before 30th June 2019.
The Exclusions
Importantly, the ordinance or as it is commonly referred to as, the amnesty is not applicable to the following:
holders of public office and their dependents as well as any of their benamidars if applicable,
a public company as defined under clause 47 of section 2 of the Income Tax Ordinance 2001;
matters where proceedings are pending in the court of law,
matters where the proceedings have attained finality under the respective tax laws,
matters where the proceeds or assets involved are derived from a criminal offence,
gold and precious stones,
bearer prize bonds and
bearer assets
TAX RATES AND VALUES
Class of Assets/Income/
Expense
Value
Applicable
Tax Rates
Domestic Immovable Properties – Land
Higher of the 150% of value prescribed by the FBR under section 68 of ITO or 150% of DC value
1.5%
Domestic Immovable Properties – Constructed
Atleast 150% DC value where FBR value has not been notified for constructed property
1.5%
Foreign Liquid Assets not repatriated
Higher of the Fair Market Value or cost, determined using exchange rates prevalent at the declaration date.
6%
Foreign Liquid Assets Actual Value Repatriated
4%
Unexplained Expenditure
Higher of the Fair Market Value or cost
4%
Undisclosed Sales Actual Value
2%
All assets except domestic immovable properties
4%
Timeline
While the declaration needs to be made by 30th June 2019, the tax can be deposited later by paying additional amount of default surcharge other than the tax rates discussed above, as outlined below:
Default Surcharge
Sr. No Time of payment of Tax
Default Surcharge Rate
1. 01st July 2019 to 30th September, 2019
10%
2. 01st October 2019 to 31st December, 2019
20%
3. 01st January 2020 to 31st March, 20120
30%
4. 01st April 2020 to 30th June, 2020
40%
Miscellaneous Provisions:
Confidentiality
While maintain confidentiality of declarations under the ordinance is required but unlike the Previous Scheme, there are no provisions in the Ordinance for imposition of fine / for imprisonment of any person in breach of confidentiality provisions.
Protection from Prosecution
The contents of the “amnesty” declaration(s) cannot be admitted as evidence(s) against the declarants(s) for the purpose of any proceedings relating to imposition of penalty or for the purpose of prosecution under any law.
Anti-Abuse Provision
An important anti-abuse provision, which was not included in the previous scheme by PMLN is that the declarants won’t be able to claim any allowance, credit or deduction in respect of the assets declared and incorporated in the books in consequence of such declaration. In simple terms, this would mean positive impact re tax compliance in future.
Key differences as compared to the PMLN’s Amnesty:
Below are the key differences of this current “amnesty” scheme as compared to the PMLN Government’s amnesty scheme:
The requirement to deposit any cash in local or foreign bank accounts would mean that the fraudulent declaration made by exaggeration with the hopes of continuing the mal-practices in future with having the “buffer” of excess declared cash to “cover” the future revenue streams would end.
The anti-abuse provision discussed above.
Inclusion of broader categories of income streams, assets, expenses and sales within the scope.
More impetus of fairer and market values as evident from 150% of FBR or DC values’ requirements mentioned above.
Comparatively higher rates of tax.
Introduction of timeline for “late” payments with default surcharges.
Lack of penal clause in case of the breach of confidentiality.
Some of the exclusions.
The reservations, impact and the way forward:
There is a well supported argument that any amnesty, generally speaking sends out a wrong message to the masses and businesses in particular as effectively the wrongdoers ends up getting a better deal without any severe reprimand. This has psychological and practical ramifications for compliance in the long term.
However, at times the economic situation does require the use of such schemes. There were other better options to achieve the stated goals of this scheme. However, there are certain things which are positive about this scheme including the requirements to deposit the cash in the bank, the focus on fair market values, introduction of later payments with default surcharges and the anti abuse provision. Certainly, there is always room for improvement and this scheme could have been made even better.
The most important challenge however would be to address the uncertainty. While, Prime Minister Imran Khan still enjoys tremendous trust in terms of his personal integrity and also retains his charisma, the general atmosphere is one of uncertainty which is severely damaging. Unfortunately, this is mostly stemming from an un-accountable media spree of speculations and negative reporting in general baring a few exceptions. To make the point, let us recall that the last amnesty by the PMLN Government only really took off when the CJP announced that the court was not to review it leading to the confidence of the potential declarants. So firstly, this uncertainty needs to be curbed for this scheme to be successful.
Secondly, the relevant authorities need to run public campaigns and demonstrate that they have the information gained via OECD multilateral convention about Pakistani residents’ offshore accounts and are further strengthening the mechanism to launch a compliance drive immediately following the amnesty. Announcement of such a compliance drive with details of the penalties and timeline, widely publicized in the print and electronic media as well as on social media and along-with the curbing of the uncertainty can and will lead to the success of this scheme.
The writer is a leading economist and tax expert who holds five top professional finance, investment and accountancy qualifications CFA (USA), CPFA (UK), FCCA (UK), CA (ICAEW, UK) & Anti-Money Laundering Specialization along-with substantial experience and represents Pakistan on Global Tax Forum while sitting on the boards of several think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about
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