Iqbal the Economist & his solutions for Pakistan– Part I

Links of Published Versions of Article:

By:

Omer Zaheer Meer,

CFA (USA), CPFA (UK), FCCA (UK), ACA (ICAEW – UK), AMLE (UK)

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

Tax Amnesty: Results, Challenges faced & Follow-up required

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By:

Omer Zaheer Meer,

CFA (USA), CPFA (UK), FCCA (UK), ACA (ICAEW – UK), AMLE (UK)

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

Fiscal Reforms: Key Taxation Trends in Pak in need of Reform

Omer Zaheer Meer,

CFA (USA), CPFA (UK), FCCA (UK), ACA (ICAEW – UK), AMLE (UK)

Links of Published Versions of Article:

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

Avail the Amnesty & Sleep Peacefully!

By:

Omer Zaheer Meer,

CFA (USA), CPFA (UK), FCCA (UK), ACA (ICAEW – UK), AMLE (UK)

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The PM’s Counsel:

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.

Technical Overview of the Amnesty: https://omerzaheermeer.wordpress.com/2019/05/19/pti-govts-tax-amnesty-past-facts-and-the-path-forward/

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




Prescription for Increasing Tax Revenues

Tax Revenue

By:

Omer Zaheer Meer,

CFA (USA), CPFA (UK), FCCA (UK), ACA (ICAEW – UK), AMLE (UK)

           Prof DP 051918 original

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Preamble:

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

 

PTI Govt’s Tax Amnesty:  Past facts and the path forward

Tax Amnesty

PTI Govt’s Tax Amnesty: 

Past facts and the path forward

By:

Omer Zaheer Meer,

CFA (USA), CPFA (UK), FCCA (UK), CA (ICAEW – UK), AMLE (UK)

IMG-20180911-WA0016.jpg

Links of Published Versions of Article:

Tax Amnesties in Pakistan:

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:

  1. holders of public office and their dependents as well as any of their benamidars if applicable,
  2. a public company as defined under clause 47 of section 2 of the Income Tax Ordinance 2001;
  3. matters where proceedings are pending in the court of law,
  4. matters where the proceedings have attained finality under the respective tax laws,
  5. matters where the proceeds or assets involved are derived from a criminal offence,
  6. gold and precious stones,
  7. bearer prize bonds and
  8. 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:

  1. 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.
  2. The anti-abuse provision discussed above.
  3. Inclusion of broader categories of income streams, assets, expenses and sales within the scope.
  4. More impetus of fairer and market values as evident from 150% of FBR or DC values’ requirements mentioned above.
  5. Comparatively higher rates of tax.
  6. Introduction of timeline for “late” payments with default surcharges.
  7. Lack of penal clause in case of the breach of confidentiality.
  8. 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