There are varying estimates of wealth Pakistanis have stashed abroad. Dar's guess was $200 billion. The growing fragility of our external sector has imposed serious financing challenges. Ability of exports to finance bulk of imports is a distant dream, foreign assistance is getting more constrained, FDI is coming more in kind than cash (CPEC), and borrowing carries a significant servicing risk that will further stress thealready precarious fiscal position.
What then can be better than enticing Pakistanis into repatriating their wealth? Assuming that $200 billion is a fair estimate we will be joyously thumbing our nose at the IMF if we can get even 5% of this wealth into State Bank coffers. There would be some collateral help on the revenue side as well as the idea is to tax (lightly) all the hard currency flowing in.
What will be the incentive for the holders of these assets to take advantage of the amnesty? Well, the world is becoming tighter for 'hidden' wealth. If the anti-money laundering or tax evasionlaws don't get you that consortium of investigative journalists will- Panama and Paradise papers are just the trailer.So why not buy forgiveness for your sins?
But there is more than a fly in the amnesty ointment.
Arguably, the amnesty measure won't do much harm to our (money laundering) image - Indonesia has done it, India and Turkey have tried it, some more are planning it - but what will happen to the OECD convention on mutual assistance that Dar boastfully signed in Paris in 2016? Will common reporting standards (CRS), that will give FBR solid information on hidden wealth beginning July this year, get relegated?If that happens won't it remove thesword hanging over foreign assets, and to that extent erode the incentive to avail of the amnesty?
Even otherwise, if one wants to transfer his funds to Pakistan aren't sufficient avenues already open to him in the form of Income Tax Ordinance (section 111) and Protection of Economic Reforms Act? Additionally, FBR is restrained from asking any questions if you have had the account for more than five years. Why then pay a 3-5% tax to enjoy an amnesty that for all intents and purposes is already there?
Architects of the scheme also chose to ignore history. Since 1958 amnesty schemes have been as frequent and predictable as sunrises. Ayub's amnesty worked (out of a total of about 226,000 tax-filers a full one third filed declarations of unreported income). Those of Yahya, ZAB, Zia, BB, Musharraf, and Nawaz didn't. It is easy to understand why: the fear factor. Ayub's Martial Law had struck fear that was missing in the subsequent amnesties. Amnesties without a credible threat of serious action afterwards just don't work.
There is also the possibility of the Supreme Court striking down the scheme, arrogating to itself the role of Martin Luther who struck out against 'papal indulgences' that forgave your sins against payment of a contribution to the church.
The quacksalvers (peddlers of false cures) who burnt the midnight oil designing this scheme seem to have missed the point of why people moved their money abroad. It was not out of fear of FBR but the fear of security and political and other risks (like freezing of FX accounts). Mostly they were buying an insurance policy.
Or maybe the planners of this move did not miss the point. What if the amnesty scheme is a smoke screen to let the rich and infamous eat their cake and have it too? What if the real purpose is to allow you to keep your money abroad against the payment of a small tax? Sanctify money laundering?
If the idea really is to shore up the fast depleting foreign exchange reserves there are less invidious ways to do it. To turn the amnesty on its head we need a stick and carrot policy. We should press ahead, full speed, with CRS effectiveness and alongside bring about the requisite legislative changes to hardenthe 'stick' - severe penalties for unreported offshore assets that cannot be justified.
Simultaneously, we should encourage the transfer-back of assets held abroad through the carrot of higher interest rates on hard currency fixed deposits in Pakistan. The interest rate can be calibrated to the term of deposit, going up to say 5% for a five year deposit (which will still be cheaper than our average borrowing costs). To the extent of the transfers they shall escape the penalties on assets discovered following a rigorous application of CRS.
Generous interest rates may attract considerable flows from non-residents too. Interest earned on these deposits will of course be taxable for the tax residents of Pakistan, uplifting the revenue side as well.
Amnesty sounds a little like amnesia. In a more specific sense amnesia means 'forgetting'. But it means forgetting a transgression, not forgetting the lessons of history - why previous amnesties did not work. The real purpose of amnesties is the acceptance that bringing citizens into compliance with a law is more important than punishing them for past offences. What has been proposed, and reportedly awaiting PM's assent, is paying for the atonement of your sins and not submitting to the law that the honest comply with. It has 'relapsed' written all over it - there is no guarantee that the hope of another amnesty another time will not make our rich and wayward repeat the transgression.
Of course what we have suggested - the fear of strong action coupled with the incentive of reasonable returns - requires lots of i's to be dotted and t's to be crossed. The minutiae of the proposal would need to be worked out; but the idea here is to generate debate, to see in what other ways we can skin the cat - short of rewarding wrong without reforming the wrong doer.
Voluntary disclosure is practiced in many jurisdictions; but it works only when not doing so strikes a fear of much worse. Add incentive to fear and you multiply the chances of success.
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