Impact Assessment of Tax Amnesties on Documenting Economy
Tax amnesties are introduced, largely, to allow for inclusion of non-documented economy in a country’s taxation system by encouraging taxable persons to declare unreported or underreported foreign as well as domestic assets; to revive economy and spur growth by encouraging a tax-compliant economy; to raise tax revenue for fiscal consolidation; to broaden the tax base for efficient and equitable taxation; and to improve tax compliance in the backdrop of weak enforcement due to limited tax capacity of tax authorities.
A tax amnesty contains one or more of the possibilities: partial or total forgiveness of tax liability; partial or total waiver of penalty and default surcharge; exemption from criminal prosecution; payment of taxes in installments; and amnesty or exclusion of a taxpayer from audit for a certain period of time.
So far, Pakistan introduced sixteen tax amnesties. Among them, tax amnesties of 2018 and 2019 were the most comprehensive as they aimed, inter alia, at improving taxpayers’ compliance to bring taxable persons in the tax net and subsequently to oblige them to pay due tax through filing of tax returns.
Tax amnesty under the Asset Declaration Ordinance, 2019, (ADO 2019) was implemented when tax-to-GDP ratio was only 13% and debt-to- GDP ratio was 72% at the end of 2018. The country was under obligation to pay $ 2.346 billion in debt servicing during third quarter of 2019. There was massive corporate and non-corporate tax evasion in the country as the World Bank (WB) reported 50% gap between actual and potential tax collection and reported that tax-to- GDP ratio could be boosted to 26% by raising compliance level up to 75% and without imposing additional taxes.
Similarly, offshore tax evasion was also considerable as collective wealth of Pakistani nationals hidden overseas was estimated to be between $300 and $500 billion. The Panama Papers and the Paradise Papers included 450 and 193 Pakistanis, respectively, who together owned as much as 5% of the total amount of $10 trillion hidden in global wealth.
High level of tax non-compliance could be estimated from the fact that tax collection with returns has been extremely low and more than 70% of total income tax collection is being realized through withholding tax regime.
Additionally, tax capacity of tax authorities to ensure effective enforcement of tax laws is limited. Individuals with high net worth are hardly taxed according to their ability to pay. The reliance of the government for balancing budgets remains on indirect taxes and withholding taxes.
Through tax amnesty of 2019, the citizens were allowed to declare undisclosed foreign and domestic assets and income, as well as undeclared sales tax expenditures. To ensure successful implementation of tax amnesties and to document economy, the government and tax authorities made earnest efforts. The tax authorities informed taxable persons that under the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the OECD Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information, the FBR has been collecting from and providing financial account information to foreign tax jurisdictions, taxable persons failing to avail tax amnesty under the ADO 2019 were liable to face potential civil, tax and criminal penalties for non-reporting assets.
Moreover, significant legislative changes were introduced to the Income Tax Ordinance 2001 (ITO 2001) and the Income Tax Rules 2002 (ITR 2002) by removing time limitation for probing sources of foreign assets, investments and expenditures. Additionally, immunity from probing foreign remittances has been limited to Rs 5 million per annum. Any amount received beyond this threshold will be liable to be probed and taxed from tax year 2019 onwards. Similarly, filing of foreign income and asset statement is mandatory, and failure to file or disclose foreign assets in the statement will attract penalty of 2% of the value of the asset or income for each year of default. The Benami Transactions (Prohibition) Act, 2017, and the Benami Transactions (Prohibition) Rules, 2019, were promulgated in the beginning of 2019. Strict punishments for persons entering into benami transactions were provided under the law.
More importantly, tax evasion has been included in the list of predicate offences to be investigated and prosecuted under the provisions of the Anti-Money Laundering Act, 2010. The punishments for predicate offences under section 4 of the AMLA were imprisonment of a minimum of one year and up to 10 years, fine of up to Rs 1 million, which may be increased to Rs 5 million in the case of a company and every director, officer or employee of the company, and forfeiture of property involved in money laundering.
After launching tax amnesty under ADO 2019, the Prime Minister repeatedly made requests to the people to declare their undisclosed assets. The tax authorities, too, undertook substantial measures to facilitate taxable persons in filing declarations and paying taxes under the ADO 2019. The FBR published frequently asked questions, online user guides and all relevant documents on its website for guidance of taxable persons.
Within a short period of about one and half month, about 124,118 individuals made declarations under the ADO 2019 and 114,228 individuals paid taxes with the declarations and 9,890 individuals opted for late tax payment with default surcharge. Total assets worth Rs 3 trillion were documented under the ADO 2019 and tax revenue fetched by the government was Rs 65.8 billion.