Leaving aside the above risk, we would make an assessment of what these ordinances aim to accomplish and how far they would contribute to strengthening tax compliance and disclosure of income and assets. We first discuss the amnesty ordinance.
At the outset, it must be noted that offering amnesty at regular intervals is a bad signal for tax compliance. The social media is filled with hate messages against the proposed amnesty scheme. Therefore, it must be accepted with considerable disdain.
Second, and mercifully, the apprehensions regarding blanket immunities from criminal and corruption obligations have been avoided by excluding proceeds of crime and corruption from the scope of the scheme. The chances of the scheme being in compliance with FATF guidelines on voluntary tax compliance (VTC) are quite high. There are four principles that determine compliance with FATF guidelines for VTC: (1) the effective application of AML/CFT preventive measures is a prerequisite for addressing and mitigating the money laundering and terrorist financing risks associated with implementing any VTC; (2)since FATF Recommendations do not allow full or partial exemptions from AML/CFT regime, a VTC giving any exemption would be in breach of FATF Recommendations; (3) when implementing VTC, all relevant authorities charged with implementing AML/CFT regime should coordinate, cooperate and exchange information to detect, investigate and prosecute any abuse of VTC in relation to AML/CFT; and, (4) widest use of mutual assistance across jurisdictions for detection and recovery of foreign assets should be made to prevent abuse of VTC.
We see that the principles (1) and (2) are fully adhered to by not granting immunity from any predicate offences. This means that full range of AML/CFT is applicable to declarations under the scheme. However, when it comes to principle (3), two provisions of the Amnesty Ordinance seem to be in conflict with this principle, namely, the provision of confidentiality given in Section-13 and inadmissibility of the declaration in evidence. These two provisions would come in the way of preventing the abuse of AML/CFT provisions. The entire edifice of AML/CFT is based on alerts (FMU receiving and passing out to other agencies, suspicious and currency transaction reports (STRs and CTRs)) and sharing of information. With confidentiality this would not be possible. In fact, how else would it be possible to determine whether the assets declared are not from corruption and crime as required under the law. Similarly, excluding declarations from admissibility in judicial proceedings would jeopardize prosecution after detection. The principle (4) would also face a similar difficulty as the use of mutual assistance may not be triggered unless information is shared.
Third, there are two minor comments regarding the provisions of the Ordinance in respect of public office holders and inclusion of their relatives. The public office holders should be excluded irrespective of when they had held the office. Also, in view of the special circumstances obtained at present, inclusion of non-dependent children would also be warranted. In fact, one would like to add a suitably defined notion of 'close associates' to be also included in the definition of public office holdeRs
Fourth, the low rates of taxation are quite unsatisfactory especially compared to many other jurisdictions where applicable rates were as high as 50%.A significant increase in rates would help make the scheme earn acceptability, which at present is quite low, besides providing much needed resources.
The second Ordinance deals with amendment in the Protection of Economic Reforms Act (PERA), 1992. The amendment requires resident foreign currency account (FCA) holders to be an income tax filer. This is undoubtedly a step in the right direction. However, it falls significantly short of what is needed to remove the ills afflicting our forex regime, which we had recently explained in a series of articles in this paper. Nothing short of banning the access of residents to FCAs and their feeding through local purchases of forex would be sufficient to make Pakistan's forex regime in line with the dictates of economic stability.
The third ordinance deals with declaration of domestic assets. In our view the comments we have made in the case of declaration of foreign assets are equally applicable to the case of domestic assets.
The fourth ordinance amends the income tax ordinance 2001 to give effect to consequential changes as well as the tax relief announced in the package. The tax relief is quite problematic. Lowering the individual tax rate from 35% from 15% is nothing less than a jolt to the entire edifice of tax structure and administration. Exact estimates are not available, but it is claimed by some analysts that nearly half a million taxpayers would be out of the net with a tax loss (expenditure) of more than Rs 100 billion. This measure becomes more intriguing when one realizes that this Government would not be bearing the cost of this populist concession. When the measure goes into effect a new government would be in office and would face an unpleasant choice of rescinding this measure as it would run counter to its immediate needs of putting country's fiscal house in order.
It is also a matter of concern that FCAs are shown as undeclared assets and allowed as an element in the list of domestic assets eligible for declaration after paying 2% tax, almost at par with the prize bonds. One can understand the presence of prize bonds being a bearer security. FCAs are declared assets and there is no bar for tax authorities to question their legitimacy or taxability for that matter. In fact, one sees a large number of registered securities (including immovable properties) being included in the list of assets qualifying for declaration. There are severe penal provisions in law for confiscation of such properties when detected, as these are local sourced assets and if they were not included in books of accounts there is no justification of giving them an amnesty.
Let us turn now to a very serious issue of whether the scheme draws curtains on the future accumulation of undeclared assets. Unfortunately, we don't see any provision that would make non-declaration prohibitively costly in the future. Even when prize bonds are included in the list, there is no provision that suggests that such an instrument would not be issued in the future. So, another scheme would be offered to offenders in the future. The honest taxpayers are asking this question with great pain in their hearts, feeling that one pays a very high cost to be honest.
(The writer is former finance secretary) [email protected]