A perspective on tax amnesty
Tax amnesty is defines as “grant of an opportunity to a specific class of society to declare their undeclared assets by payment of a meagre amount of tax in addition to grant of immunity from default surcharge, penalties and prosecution”. It is introduced by the governments to fulfill the slogan of increasing tax revenues by tapping the informal economy, and was therefore offered in several European countries in addition to Malaysia, Canada, the USA, India and Pakistan.
The history of Pakistan is witness to the grant of tax amnesties in various decades with the slogan of improving the tax-to-GDP ratio, tapping the informal economy, and increasing tax revenues, but are seen by the compliant taxpayers as an incentive for being non-compliant. Interestingly most of the amnesties in Pakistan were announced before general elections and were reckoned by the compliant taxpayers as an attempt to clean the ill-gotten money made during the tenure. No country in the world is as generous as Pakistan in the grant of tax amnesties for the aforementioned reason.
People successfully managed to transfer their ill-gotten money to offshore destinations from Pakistan due to the weak taxation system, the Economic Protection Act 1992, and other reasons, and purchased offshore assets without declaring them in their tax returns. Consequent upon making an agreement with the OECD, Pakistan started receiving data of such resident Pakistanis from different countries.
The effort of the bureaucracy within and outside the Federal Board of Revenue successfully managed to help the tax dodgers escape from the wrath of law, frustrating the PM in his efforts for retrieving the ill-gotten offshore assets, resultantly paving way for another amnesty
The Panama and Paradise Leaks revealed accumulation of offshore assets by Pakistanis, reflecting flaws in the enforcement regime of the country and ultimately led to the disqualification of the sitting Prime Minister of Pakistan.
The Foreign Tax Amnesty Scheme 2018 was announced by the government to give an opportunity to the tax dodgers to declare their offshore assets. Many resident Pakistanis having offshore assets became part of the formal economy by availing the scheme which lasted till August 2018.
Retrieval of undeclared offshore assets was one of the points of the Pakistan Tehrik Insaf manifesto during the election campaign. The Imran Khan government created an asset recovery unit in the Prime Minister’s Secretariat, and was seen sincerely and aggressively pursuing the task.
The FBR established the Automatic Exchange of Information (AEOI) Zones in Karachi, Lahore, Islamabad, Multan, Quetta and Peshawar for initiating and finalizing proceedings against such tax dodgers. The information was shared with these zones of resident Pakistanis having offshore assets. These zones were seen as a beacon of light for the almost crippled FBR and the economy of Pakistan. It was expected that the government would give special powers and resources to the zones for effectively checking offshore noncompliance.
The government, through First Finance Amendment Bill 2018 introduced section 116A in the Income Tax Ordinance, 2001 for declaring offshore assets in addition to amendment in section 111 of the Income Tax Ordinance, 2001 by virtue of which the undeclared assets would be taxed in the tax year preceding the tax year of discovery. It means that information received in tax year 2019 in respect of offshore assets would be taxed in tax year 2018.
The AEOI Zones started operations by issuing notices to holders of offshore assets holders of Panama, Paradise, Dubai, United Kingdom and CRS. The zones had the support of the Supreme Court of Pakistan in Dubai there were cases where remarkable recoveries were made. The compliance ratio in the proceedings initiated by the zones was remarkable.
The concept of AEOI, reckoned by many as a lifeline for the economy of Pakistan, since its inception was marred by bureaucratic hurdles. It could be heard requesting for provision of adequate human resource, budget for repairs and basic logistics required for taxation of the undeclared offshore assets.
The government, through Second Finance Amendment Bill introduced section 230E in the Income Tax Ordinance, 2001, creating the Directorate General of International Tax Operations without mentioning the names of the functionaries in the authorities under the Income Tax Ordinance in addition to restricting the scope of the proceedings to ex-parte. This amendment paralyzed the AEOI Zones already crippled due to bureaucratic hurdles.
Simultaneously the FBR in an unprecedented move announced extension of the date of filing of tax returns for tax year 2018 to April 30th 2019. This move can be coined as the final nail in the coffin of the AEOI zones for taxation of the undeclared offshore assets as its mandate was to amend the tax returns for tax year 2018.
The effort of the bureaucracy within and outside the Federal Board of Revenue successfully managed to help the tax dodgers escape from the wrath of law, frustrating the PM in his efforts for retrieving the ill-gotten offshore assets, resultantly paving way for another amnesty.
It is heard that the proposed amnesty scheme is inclusive of Benami Assets, possession of which is an offence under the Pakistan Penal Code and the Anti-Money Laundering Act. No country in the civilized world has given amnesty on benami assets.
The future of an economically viable Pakistan lies in the elimination of red tapism, and the rule of law, not tax amnesties.