Dec. 11 (Bloomberg) -- Three million of Pakistan’s richest income tax evaders will get 90 days to take up a government amnesty offer after which they will be hounded by inspectors under the nation’s most ambitious plan to improve its finances.
The cabinet has approved an amnesty proposal targeting 3.1 million people officials identified as having avoided paying income tax in a country that’s among the 15 lowest revenue gathering nations in the world. Under the plan, each will be able to pay a one-time 40,000 rupee ($413) penalty on undeclared income and assets of up to five million rupees, according to Asrar Raouf, a senior official at Pakistan’s tax collection body, the Federal Board of Revenue.
“This is our most drastic step to widen the tax net,” Raouf said in a Dec. 7 interview at his office in Islamabad. “We will go after these tax evaders if they don’t respond and cripple their lives.”
The government says the proposals will help Pakistan repair its finances after recording the highest budget deficit in two decades in the fiscal year that ended June as it missed its tax collection target and international assistance plunged. Critics including rival politicians and former advisers to the finance ministry say the primary aim is to protect the illegally stashed wealth of government supporters.
“This is our effort to bring the hidden wealth into the tax net,” Farhatullah Babar, spokesman for President Asif Ali Zardari, said in a phone interview yesterday. “The government is giving this opportunity to tax evaders before launching a meaningful crackdown.”
The South Asian nation has to repay about $7.5 billion to the Washington-based International Monetary Fund by 2015, with $1.2 billion handed over as of June, Moody’s Investors Service said in July, when it cut Pakistan’s credit rating deeper into junk status on falling reserves and political instability.
Only 856,000 people pay income taxes in the country of about 200 million people. Each tax payer contributes on average 13,673 rupees, according to the revenue board.
To enforce their writ, Raouf and his colleagues are seeking powers from parliament to block tax evaders’ national identity cards, which are required for necessities such as opening a bank account or arranging a cell-phone connection. The amnesty plan may be presented to lawmakers this week, Raouf said. In another concession, evaders can pay one percent of their wealth to legalize unlimited hidden assets and income, he said.
The amnesty, Pakistan latest attempt to raise revenue collections, underscores the government’s failure to seriously tackle the most important structural flaw in the country’s economy over its five years in power, said a former adviser to the finance ministry.
“It shows we have failed to reform our tax collection machinery,” said Sakib Sherani, now chief executive officer at Macroeconomic Insights in Islamabad. “You’re telling people that we can’t catch you, so please come and take this offer.”
Earlier attempts to persuade tax evaders have failed, said Ashfaque Hasan Khan, who has also advised finance ministry officials and is currently a professor at the business school of National University of Sciences & Technology in Islamabad.
“The purpose of these schemes is not to bring people under the tax net but to protect those people who made illegal money during the government’s tenure,” Khan said in a Nov. 28 interview in Islamabad. The evaders “know the National Accountability Bureau will go after them, once they are out of power.”
The government led by Zardari’s Pakistan Peoples Party will seek re-election in parliamentary polls due by May. Then military ruler General Pervez Musharraf offered an amnesty in 2000 that was taken up by 88,000 people, the Karachi-based Pakistan Economist reported that year.
“This is a total fraud,” said Shafqat Mahmood, secretary of information for the Pakistan Tehreek-e-Insaf, or the Movement for Justice party, led by former cricket star Imran Khan. “This is just a way to whiten the black money made through corruption and it’s just a disaster. It’s against those taxpayers who are honestly and diligently paying their taxes.”
In a major data mining exercise carried out with the help of the country’s National Database and Registration Authority, the tax bureau has identified non-tax paying Pakistanis who regularly take foreign trips and have houses in upmarket localities, Raouf said. The majority of the evaders are male and involved in professions including commodity trading and retailing.
The International Monetary Fund said the amnesty will discourage honest tax payers from continuing to pay up and is a short-term solution to much deeper problems, such as the chronic bribing of tax department officials to look the other way.
Some IMF directors urged reconsideration of the tax amnesty in their Nov. 29 assessment of the country’s economy, advising Pakistan to consider credible alternative revenue measures, including a modified General Sales Tax and strengthening the income tax system. The fund stopped payments from its $11.3 billion loan program in 2010 after Pakistan failed to reform its tax collection and cut its budget deficit.
Pakistan’s tax revenue as a percentage of gross domestic product was 10 percent in 2010, smaller than nearby Nepal, before falling to 9.3 percent by June last year, according to World Bank data. Only 25 percent of the economy is taxed if the undocumented sector is taken into account, Sherani said.
Hurt by record power blackouts, the army’s fight against militants in the northwest, and sectarian and ethnic clashes in the commercial hub of Karachi, the economy will probably expand 3.25 percent this fiscal year, insufficient to achieve significant improvements in living standards and absorb the rising labor force, the IMF said in its assessment. The government is targeting expansion of 4.3 percent.
The nation faces “deep seated structural problems,” including a fiscal deficit that has contributed to price pressures, according to the fund.
Former Finance Minister Shaukat Tarin said in 2010 that Pakistan loses 800 billion rupees a year in tax evasion. The government is seeking to collect 2.381 trillion rupees in taxes this fiscal year, not enough to close the budget gap, which is likely to touch 6.5 percent of GDP against the target of 4.7 percent, the IMF said in its report.
If it achieves a 70 percent success rate, the government forecasts it will add two million tax payers with the amnesty, Rauf said. To avoid corruption, tax payers will not need to come in contact with any tax officials. Instead, they can pay their taxes at the National Database and Registration Authority, Raouf said.
“Before going on a big hunt, it’s natural that you need to give them a last chance. And this is going to be the last one,” Raouf said.
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