Huzaima Bukhari & Dr. Ikramul Haq
It is disturbing to hear that the Federal Board of Revenue (FBR) is contemplating yet another tax amnesty scheme for tax evaders. The Parliament instead of entertaining any such scheme should seriously consider introducing asset-seizure legislature to confiscate untaxed assets, and make laws to bring back looted money from abroad—parked in Swiss banks and other tax havens. It hardly needs a debate that tax amnesty and money whitening schemes constitute acts of betrayal—cheating the honest taxpayers and the nation.
One needs to remind the government of its solemn promise to the Parliament in 2008 that after ‘Tax Investment Scheme of 2008’ it would not introduce any more amnesty schemes—though it offered thereafter the same to stock exchange investors in April 2012 and all kinds of concessions to tax evaders in the months of May and June 2012 to achieve the budget target of Rs. 1952 billion, but missed it by over Rs. 70 billion.
According to a report published in Business Recorder of 15 August 2012, the Federal Board of Revenue (FBR) is working on a new assets amnesty scheme for legalizing movable and immovable assets/properties “on payment of nominal amount of taxes to generate revenue and bring un-documented economy into the formal regime”. For this purpose, the report says, FBR is analysing different options to chalk out a time-bound amnesty scheme for the regularisation of un-disclosed assets like vehicles, plots and houses/bungalows on payment of some nominal amount of taxes”.
FBR, according to the report, is examining various ideas to finalise some kind of attractive ”Assets Amnesty Scheme” for the general masses. Once the idea is finalised, some workable scheme would be considered “with ample legal backing under Income Tax Ordinance 2001”. The estimated revenue, period of the scheme, rates of taxes, legal implications, result of past amnesty schemes and other modalities are being worked out before finalisation of time-bound ”Assets Amnesty Scheme”. The scheme is expected to be launched following completion of the said exercise. The report further reveals that FBR earlier finalised an ”Assets Amnesty Scheme” for the months of May and June 2012 to generate “handsome amount of revenue”, but the same was not approved by the Ministry of Finance.
It is high time that our economic and tax managers should realise that amnesty schemes are not be used as a measure to raise revenue as these discourage honest taxpayers and create distrust in State institutions. On the contrary, practical and workable steps should be taken to deal with the menace of tax evasion and increase revenues by adopting innovative means. Amnesty schemes, by their very nature reflect defeatism, do not curb tax evasion but on the contrary, encourage it.
The government should constitute a nonpartisan house committee to study the methods and channels for bringing looted, untaxed money lying in various banks abroad. If it is done, all the parliamentarians, irrespective of their affiliation with any political party, would certainly support efforts aimed at eradicating corruption and bringing back looted national wealth from abroad. Mr. S.M. Zafar as a Senator intended to table the following resolution:
“It is resolved that since there is a paradigm change in the financial and banking world on the issue of secrecy of account and since the developed countries have shown willingness to cooperate with state whose government brings to its notice the money taken out of the country, illegally and particularly through avoidance of income tax and on signing of MOU between the countries of origin and that of the country in whose bank or financial institution, the amount is deposited or if any property is traced to have been purchased through that amount, the later country where the amount is so deposited or used, do transfer the deposited money and take further action for the return of the assets of the state of origin. Therefore, Government of Pakistan under Article 25(1) of the Avoidance of Double Taxation Treaty with Switzerland, should as a first step seek information regarding Pakistanis maintaining accounts in the Alpine state, as has been done by many countries in recent months”.
It is not known whether Mr. S.M. Zafar succeeded or not in tabling the above resolution, but it can be done even now. In our article, Swiss ‘Return of Illicit Assets Act’: We can get billions back!’, Published in Business Recorder on October 8, 2010, we quoted the efforts of various countries in bringing back looted wealth from Swiss banks and demanded that Pakistan government should also re-negotiate the Avoidance of Double Taxation Agreement with Switzerland to seek details of accounts of Pakistanis held in Swiss banks. It has already been done by India and many other countries.
It is now even admitted by FBR that tax gap is about 70% of actual collection. The menace of capital flight to tax havens has deprived the country of investment and employment. The issue of tax evasion should not be seen in isolation. Pakistan is suffering due to huge fiscal deficit and debt burden as revenue leakages are increasing every year and looted wealth is parked outside. The onus is now on the government to show firmness in dealing with the issues of corruption, flight of capital, tax evasion and tax avoidance as been done recently by the Indian government and issued a detailed report that is available at:
http://www.itatonline.org/info/index.php/measures-taken-by-the-government-to-tacke-black-money/ .
We have contacted a number of parliamentarians on the issue of combatting tax evasion and corruption. All of them have shown strong indignation over flight of capital from the country as well as tax evasion. They vowed to strongly oppose any tax amnesty scheme. It is shocking to know that the officials of FBR are attempting to convince the government to announce yet another tax amnesty scheme. Historically, all tax amnesty schemes in Pakistan miserably failed. Such schemes amount to a premium for dishonesty. Pakistan has a permanent tax amnesty scheme in the form of section 111(4) of the Income Tax Ordinance, 2001 that facilitates tax evaders. It guarantees tax exemption for money brought into Pakistan through normal banking channels. This section protects tax evaders as they get untaxed money whitened by paying just extra 1.5% to 3% to any money exchange dealer to get remittance in their names. This section has helped in bringing into Pakistan huge foreign funds as remittances, crossing the US$ 12 billion mark in fiscal year 2011-2012. This section has been abused cleverly by Pakistani tax dodgers to launder their untaxed money through State patronage!
Large-scale tax evasion and the existence of a large black economy while resulting in colossal loss of revenue to the State, tends to reduce the built-in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary pressures and raise prices of real property. In the context of the prevailing grave challenge to combat terrorism, together with money laundering crisis, and the problem of ever-growing black money, (which according to official and independent experts is twice the size of the regular economy), there is an urgent need to launch a well-thought for asset seizure law to prevent this huge money from becoming a lethal weapon in the hands of mafias who are now in control of economy as well as the government. Before launching such a law it is important to identify the sources that generate black money. If such sources are not blocked, black money will keep on thriving notwithstanding the existence of stringent laws. The presence of black money is very apparent in Pakistan, but its criminal accumulation and generation is not revealed and the offenders are not punished. This baffles the minds of honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties?
During the last 25 years, money launderers in Pakistan hardly needed any international channel for money laundering. All support from the State was available at home. Even today, if anybody brings money (earned from drug trade or any illicit activity or even one’s own untaxed money, hiring services of local money exchangers to depict it as remittance) in Pakistan through normal banking channels, the State Bank and tax authorities do not pose any question about the “source”. Tax evaders, drug-arm-human traffickers, rent-seekers and terrorist apparatus remit millions of rupees into the country every year from bank accounts maintained in various countries in fictitious names. This money, in the hands of drug-mafia, tax evaders and terrorist networks has made them invincible, besides making life harder and harder for those who earn from legitimate sources.
In the Income Tax Ordinance 2001, promulgated on the dictates of IMF on 13 September 2001, section 111(4) was inserted, facilitating money launderers to remit (laundered is a more appropriate term) their ill-gotten money through banking channels and surrender the foreign currency to the State Bank in exchange for Pakistani rupees as encashment. In this way they escape not only taxation but also any probe from FBR. This scheme, presumably announced as a measure to attract huge foreign funds to Pakistani economy succeeded immensely as foreign remittances of Pakistan crossed the US$ 12 billion mark in 2012 in 2013 it will be more than US$ 13 billion. This scheme has been used liberally and cleverly by tax evaders to launder their money with State patronage.
The people hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less an amount than what they would have been required to pay under the regular income tax/wealth tax regime. It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who are paying their taxes honestly at much higher rates than those offered to tax evaders in amnesty. The ugliest face of black money emerges in the corridors of power, political as well as administrative. No country other than Pakistan knows better the dangers of allowing money launderers and drug traffickers to get an upper hand. We are at present not only facing a drug-abusing population of nearly 4 million, mostly young, but also many terrorist organisations, which by themselves are a threat to the government. The fact is that a cartel or a group of cartels have become so powerful that they can work out agreements with terrorists and saboteurs to undermine the authority of the State.
The last tax amnesty scheme called ‘Investment Tax on income’ inserted vide section 120A of the Income Tax Ordinance, 2001 gave facility to whiten untaxed money and assets by paying just 2%. It miserably failed as only Rs. 2.5 billion were received. The earlier schemes also met the same fate. Under all the tax amnesty schemes we failed to collect even a fraction of the black money in circulation. Pakistanis will not respond to any tax amnesty scheme as they know that by just paying 1.5% to 3% premium they can get all their money “whitened”, courtesy section 111(4) of the Income Tax Ordinance, 2001 and section 3 read with sections 5 and 9 of the Protection of Economic Reform Act 1992.
We can also learn from the experience of India. In India, when the Voluntary Disclosure Scheme, 1997 was announced, the civil society strongly objected to the same and represented to the Government to drop the proposal. However, the scheme was implemented. The civil society challenged the Scheme before the Bombay High Court (1997) 228 ITR 63 and by way of further appeal to the Supreme Court (1998) 231 ITR 24. It is pertinent to mention that before the Indian Supreme Court, a statement was made by the then Attorney General of India that the Government would not introduce any such scheme in future that could affect the morale of the honest tax payers. In Pakistan we have a perpetual tax amnesty since 1992 in the form of section 5 and 9 of the Protection of Economic Reforms Act 1992 and section 111(4) of the Income Tax Law.
In India more than 14 disclosure schemes were introduced but statistics given below confirm that the response had not at all been encouraging and the parallel economy continued to thrive. Today, the Indians have stacked trillions in Swiss banks alone, while Pakistanis have billions lying in the Alpine State.
The various schemes introduced in India were:
1) Demonetization of High Denomination currency notes in 1946 and 1978
Out of estimated stock of Rs. 1,440 million in circulation in 1946, notes to the tune of only Rs. 90 million were presented for conversion (6.25%) and the corresponding figures for the 1978 scheme were Rs. 1,600.5 million in circulation and Rs. 200 million converted (5.45%).
2) Voluntary Disclosure Scheme, 1951(Tyagi Scheme).
Amount disclosed Rs. 700 million and tax gathered of Rs. 110 million only (15.7%).
3) Voluntary Disclosure Scheme ,1965.
Section 68 of the Finance Act, 1965, popularly known as ‘60: 40 scheme’: two thousand persons made disclosure amounting to Rs. 520.18 million and paid tax of Rs. 300.80 million only.
4) Voluntary Disclosure Scheme – II
Section 24 of Finance (No.2) Act, 1965, 114,226 persons made declarations offering income of Rs. 1,450 million and paid tax of Rs. 190.45 million.
5) National Defence Gold Bonds, 1980, issued in 1965
6) Voluntary Disclosure Scheme, 1975
Income declared Rs. 7,440 million and wealth declared Rs. 8,340 million. Income Tax paid Rs. 2,410 million and Wealth Tax paid Rs. 70.70 million.
7) The 1981 Special Bearer Bonds, Immunities and Exemption Ordinance Act
The scheme provided for issue of 10 year bonds of the face value of Rs. 1,000 each and on maturity the holders were to receive Rs. 12,000/-for each bond. The sales were not encouraging.
8) Amnesty Scheme, 1985
This covered both Income Tax and Wealth Tax and the amount mobilized was a paltry sum of Rs. 70 billion over a period of one year.
In 1991, Dr. Manmohan Singh, then as Finance Minister, came up with a number of schemes for mopping up black money. The National Housing Bank Deposit, the Foreign Exchange Remittance Schemes, the India Development Bonds in US Dollars and the Gold Bond Scheme were all brought in. The National Housing Bank Deposit Scheme failed miserably. The India Development Bond and Foreign Exchange Remittance Schemes were in reality firefighting operations undertaken because of the precarious foreign exchange reserve position in 1991. Partial convertibility of the rupee was introduced in the hope that it would reduce the under/over invoicing racket by reducing the differential between the official and unofficial rates of exchange.
The first and foremost objection to any Amnesty Scheme is that it betrays the honest taxpayer and the nation as well. The message sent out by repeated tax amnesty schemes is that taxes are regularly paid by only the honest taxpayers, whereas the “wise” wait to avail benefits of such undesirable schemes. Instead of going for new tax amnesty scheme, the government should consideration the following:
1. Honest taxpayers who are filing the returns regularly should not be harassed. 98% returns could be accepted while only 2% returns may be scrutinized through selection based on a method that is both pragmatic and transparent. While administering tax laws, officers must encourage the culture of tax service rather than culture of tax collection. Tax Intelligence System (TIS) should be developed to detect tax evasion and under reporting.
2. Tax evaders must be dealt with strictly. Tax Intelligence System and the process of Survey and Search must be intensified and all tax evaders who have not been filing returns must be brought in the tax net. When a person is subjected to search, the Government should not invite that person/entity to any official function till clearance from tax administration. Even the social and political organizations should refrain from calling such persons as chief guests and the tax evaders should not be honoured either by the Government or any political/social organizations. Any person who is awarded with State honour, if later is found to be a tax evader, the Government should strip him of the honour.
3. Lowering tax rates, efficient tax administration and granting refunds within prescribed time limit would encourage voluntary compliance. In Singapore, personal taxation ranges between 3.5% to 20%, while corporate tax is levied at 17%. With reduced tax rates, there would not remain any incentive to use the route of tax havens.
4. Increasing taxpayers by voluntary tax compliance
National Tax Number (NTN) should be compulsorily mentioned in the event of:-
- Purchase of air tickets for local and foreign tours;
- Sale/purchase of immovable properties where value exceeds Rs. 5 million;
- Payment of over Rs. 25,000 on electricity and telephone.
The law must require transactions through banks in all payments and receipts above Rs. 50,000, even in relation to agricultural transactions. This would substantially increase the tax base.
5. Encouraging honest officials and taking strict action against corrupt officials
When a government officer is caught for corrupt practice, a lot of publicity is given but the final outcome of the action is not made available to the public. Every year, FBR should publish such information on its website.
Laws alone cannot prevent the commission of crimes. Nor can a taxpayer whose position is that of a lamb before a corrupt wolf-like official, fight against corruption. It is the combined, united and forceful efforts of the government, taxpayers and tax practitioners that can do a lot for preventing corruption. FBR should engage Tax Bars in its efforts to fight corruption and revenue leakages.
Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan. According to figures released by independent quarters, the parallel economy is growing at an alarming rate of 22.93% per annum. Every fifth rupee transacted in Pakistan is black. This is not the final count. We have yet not accounted for kickbacks in arms deals, foreign trade, smuggling (e.g. huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic.
It is tragic that in a country where billions of rupees are being made on daily basis in rent-seeking, speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low [below 10%] and the Government seems least bothered to tax undocumented economy and benami (name-lender) transactions. The mighty sections of society are engaged in these transactions and FBR being their handmaid has neither will nor ability to tax them. It exposes the uselessness of FBR as an institution to tap the real tax potential of the country. It needs to be revamped and given the autonomous status like State Bank of Pakistan.
One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society. They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth. This shatters the faith of the common man in the dignity of honest labour and virtuous living. It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country’s economy, which if not checked in time, is certain to culminate in its death. The answer is not yet another amnesty scheme but asset-seizure legislation to confiscate all un-taxed assets at home and having provisions to seek help of international comity and organisation to bring back looted and/or untaxed money back.
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The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences (LUMS).