The Panama leaks jolted the world and Pakistan, involving 650 odd Pakistanis for having created the shell companies and parked sizeable amounts of purportedly untaxed money in the undeclared accounts. According to one estimate, the assets of Pakistanis located outside the country are in a range of US$ 80 to US$ 120 billion. This amount was result of tax evasion and non-disclosures and commissions that could not be detected due to various factors including in-efficiency of FBR.
The Panama leaks pertained to tax evasion and non-disclosures but this important fact got by-passed in the apex court proceedings that could not really get down to the laws sponsoring and limitation issues in tax statutes that bar cognisance after a few years as well as other legislations and schemes that facilitate such large scale tax evasion, had no mention in the judgement. Ironically, the JIT will not be represented by FBR that holds basic jurisdiction of taxation under the constitution and other agencies come into picture there-after.
Pakistan is also a tax haven of its kind where the tax-to-GDP ratio is third lowest in the world. Income Tax, Sales Tax and FED laws have not been extended to FATA and PATA inspite of Pakistan getting independence about 70 years back and still there are numerous tax exemptions, cumulative cost of which is estimated at Rs 500 plus billion. Only a million odd people are tax filers and out of this number about 31% paid NIL tax.
As of today, one could legally open a foreign currency account, can invest any amount and earn interest without any obligation even to declare in the annual Tax Returns & enjoy ostentatious living. Similarly, no question can be asked about sources of investment made and protected under Economic Reform Act & about proceeds of Foreign Exchange Bearer Certificates encashed from the bank and foreign remittances of any proportion. Big multi-national corporations can conveniently do "Treaty Shopping" and benefit from special arrangements in tax treaties and "Transfer Pricing" to avoid their tax responsibilities. Over and above, tax amnesty schemes are regularly announced for whitening the wealth by paying a nominal tax on hidden accounts and income. Lax enforcement adds salt to the injuries.
In tax havens, the laws do not require those forming a corporation or any other legal entity to identify the beneficial owners, that is, the natural persons who own or control the entity. A World Bank study also concluded that most cases of large-scale corruption involve the use of corporate vehicles to conceal actual beneficial owner-ship. John D. Rockefeller made a pertinent statement; "Own nothing but control everything". After 9/11, there has been a lot of emphasis and legislation has been made regarding Beneficial Ownership. The International Convention on Prevention of Corruption 2005 was introduced followed by legislation on money laundering. Exchange of information has been simplified and amendments made in the bilateral tax treaties.
Globally, special measures have been undertaken to tackle effectively the matters regarding tax evasion through shell companies and other methods. The UK had an agreement with which enables its citizens to declare previously undisclosed assets. Germany once purchased the information from Swiss banks about concealed accounts & proceeded against more than 1200 taxpayers. The tax evasion scandal implicated German financial institutions that administered certain trusts, helping their wealthy clients to hide their assets in the tiny state of Liechtenstein to avoid paying tax. Recently, Denmark purchased information about concealed assets and took action against tax defaulters. The US tax laws have IRS's Offshore Voluntary Disclosure Initiative where taxpayers may declare undisclosed foreign accounts & pay eight prior years' taxes, plus a 20% accuracy penalty, and an additional penalty of 27.5% of the highest account value to avoid criminal prosecution and penalties, especially if the non-compliance is willful.
State of taxation in Pakistan is bad on account of general tax evasion trends and several "Enablers" of tax evasion as aforementioned. Our system has limited direct taxation as the real Direct Taxes have already been eliminated one after one which include the Gift Tax, Wealth Tax and inheritance tax like Estate Duty to save the interest of elite and made Pakistan unique having none of such taxes. There are limitations in fiscal statutes and rules regarding maintenance and production of books of accounts that too help one to avoid taxes.
The framers of Constitution must be praised for having provided Articles like 184(3) that could provide justice which is direct, substantive and speedy way than the formal legal system and provide room for public interest litigation that could cut through unnecessary procedures, formalism, and common law conservatism causing delay rather than getting right to the heart of the core issues of society at large. On account of inquisitorial role and power to hire or appoint experts to assist the court, there appeared a room for a decree for review of stated snags in the tax statutes.
The exceedingly high media enthusiasm and political rancor wasted a rare venue for thoughtful discussion as renowned legal experts and legislators, in their Petitions or Bills on Panama introduced in the parliament, never proposed to undo tax whitening legislation. Obviously, how their beneficiaries could talk of measures that could deny them the luxury of enjoying tax free incomes. Notices by FBR bore little result ostensibly for limitations in the tax statutes. Therefore, common man had expectations from Hon'able apex court for enquiry into laws that help amass huge wealth. The atmosphere is also congenial as of late, investment in tax havens and non-reporting is no more considered a popular act whereas the parliament will hardly encourage such legislation.
There was an historic opportunity for setting the system right and it would have been most appropriate if Hon'able apex court had gone an extra mile by taking the cognisance and issuing directions to hold enquiry into actual use/misuse and explored the possibility of doing away with the tax whitening schemes and laws that manifestly facilitate tax evasion by invoking the provisions of Article 184 of the constitution of Pakistan. The matter of tax evasion obviously raises a question, which is of interest to, or affects the whole body of people and is essentially a matter of public importance. A judgement on it could have helped preserve, protect and defend the constitutional provisions relating to social justice.
No doubt, retrospective withdrawal of fiscal legislation is usually not considered advisable (although cases involving criminal extent could be roped into it). Yet, at least for the posterity, such legislation was needed to be revoked. This opportunity has, however been lost.
(The author is a retired Member FBR and available at sardar.ameen@gmail.com)
Copyright Business Recorder, 2017