Pakistan moves against
tax-dodgers By Syed
Fazl-e-Haider
KARACHI - The Pakistan
government Prime Minister Raja Pervaiz Ashraf,
which is due to face a general election by next
March, has indicated that it intends to bring
millions of tax evaders into its revenue net with
a carrot-and-stick policy that critics say will
merely encourage corruption.
The federal
cabinet last week approved the Tax Registration
Enforcement Initiative, which provides the rich an
opportunity to legitimize hitherto undeclared
money by paying a minimum tax. The initiative aims
at bringing 1.3 million people into the tax net in
the short term; at present barely 1% of 180
million citizens pay income tax.
Under the
new law, tax evaders's assets will be seized,
their cell-phone connections frozen, and their
computerized national
identity cards
suspended. They could also be barred from leaving
the country. Ali Arshad Hakeem, who took over as
head of the tax-gathering Federal Board of Revenue
(FBR) in July, is at the same time offering a
10-week amnesty for those who choose to accept a
small tax burden.
Hakeem has vowed to
resign if his campaign fails. "We will issue
notices to evaders after approval of the proposed
law, and it will not be very difficult to hit
them, as we have full data available about them,
whether they are politicians, businessmen,
cricketers or showbiz people," AFP reported Hakeem
as saying.
Critics say the amnesty is a
charter for cheats that will encourage money
laundering, as people will not have to declare the
source of any illicit earnings. The scheme is
likely to spread more corruption, as it will not
only help people make money illegally but also
legalize it through such amnesty, they say.
"It will erode the tax system. It will
help people learn techniques how to whiten their
black money," AFP reported Hafeez Pasha, a senior
economist and former finance minister as saying.
"The government should publish a tax directory and
shame the evaders instead of bringing out this
scheme. This amnesty will destroy the tax system."
Pakistan has a tax-to-GDP ratio of around
9%, one of the world's lowest. An US$11.3 billion
loan program signed in 2008 with the International
Monetary Fund (IMF) ended incomplete last November
after the weak coalition government, threatened by
a walk-out of some members, failed to implement
tax reforms demanded by the Fund.
A
significant segment of the country's economy is
still undocumented and the untaxed underground
economy continues to grow, depriving the national
exchequer of its due share.
"The demand
for cars, luxury goods and housing reflects the
availability of wealth in the country...
unfortunately, the [size of the] tax base is not
commensurate to this phenomenon," The Express
Tribune reported Prime Minister Ashraf, who has
urged the tax authorities to plug the leakage of
taxes, as saying. "The menace of capital flight to
tax havens has deprived the country of its true
potential for development and progress."
The widespread tax evasion also sends a
negative signal to international donors, who have
indicated that their own taxpayers are no longer
able to shoulder the burden of Pakistan's
high-earners who avoid tax payments and leave
their government depending on aid and grants from
other countries.
Federal Finance Minister
Hafeez Sheikh has vowed to change the culture of
tax evasion by bringing into tax net everybody fit
to pay taxes.
The Federal Board of Revenue
is the country's main revenue collection authority
and is regarded as the guardian of the national
treasury, as it conducts regular audits of
taxpayers. In the fiscal year that ended in June,
the FBR missed its 1,952 billion rupee (US$20
billion) revenue target by 43 billion rupees. The
shortfall widened the 2011-12 budget deficit to
more than 8% of GDP, more than double the 4% set
for the year.
Hakeem's critics say he will
need time to prove his mettle because many
powerful bureaucrats belonging to chartered
accountants and district management group have so
far failed to deliver in this regard. He has been
given a two-year contract. His predecessor, acting
chairman Mumtaz Hyder Rizv, lasted only from
February this year to July after failing to reach
the revenue target.
Hakeem faces a tough
challenge: hardly anyone has been prosecuted for
tax evasion in the past 25 years. He may believe
his background will prove an advantage, having
previously served almost four years as head of the
National Database Registration Authority. He has
also worked on business process outsourcing
operations and computerization of land records and
customs procedure automation.
The real
question is whether he has full command and
control over senior FBR officials, as most
reportedly oppose any change to the status quo.
Vested interests inside the FBR not only create
problems by making half-hearted efforts to raise
revenues; they recently challenged in the Supreme
Court Hakeem's appointment as FBR chairman.
While tax evaders have enjoyed amnesties
in the past, with honest citizens paying the
price, a big reason for not paying tax is the lack
of public trust in the government, where
corruption is rampant and little is returned in
terms of social welfare, social security and
better health and education facilities.
The government meanwhile spends with
little restraint. Prime Minister Ashraf disposed
of his annual discretionary development budget of
22 billion rupees in just three-and-a-half months,
and has since received a further 10 billion
rupees, indicating how the ruling elite in the
hugely indebted nation are lavishly spending
taxpayers' money in constituencies of their choice
ahead of the general elections.
Syed
Fazl-e-Haider
(http://www.syedfazlehaider.com) is a
development analyst in Pakistan. He is the author
of many books, including The Economic
Development of Balochistan (2004). He can be
contacted at sfazlehaider05@yahoo.com.
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