Asrar Raouf describes an unusual financial step
It was considered surprising by many monetary and fiscal experts that the incumbent government has resolved to bring about yet another tax amnesty scheme despite the widely-known disapproval of the IMF regarding such financial measures. It is the avowed policy imperative of international financial institutions particularly the IMF that short-term and irregular concessionary taxation provided by governments frustrate the regular tax payers who take such measures as wrongly equating their position with the beneficiaries of amnesty schemes. It appears that the incumbent government has taken this conscious decision in direct contravention of IMF guidelines despite the hectic efforts recently taken to fulfill all conditions laid down by it for continuation of the IMF programme.
Alternatively the argument that could be forwarded in this context supporting the government’s proposal is that IMF has given its tacit approval for undertaking this irregular measure but then it is highly probable that an institution of IMF’s repute would bend its rules for an extremely unpredictable economic structure like Pakistan. It may be worthwhile to point out that the IMF has barred Pakistan from giving further tax amnesty scheme during the currency of the IMF programme after the PTI government gave a tax amnesty scheme in May 2019. Then again, the PTI gave second tax amnesty scheme to the construction sector in April 2020 but the second amnesty was given with the IMF’s consent under the guise of providing relief to the people from the adverse Covid-19 impact.
It must therefore be appreciated that Covid-19 period represented extraordinary times globally and it could not be equated with the current circumstance. In this situation it looks likely that the bulldozing financial outlook of the incumbent financial management team has been instrumental in getting this measure through eliciting the approval of the decision-making quarters that matter who are desperate to raise money for the national coffers by all means possible. The measure is yet again undertaken despite the fact that it had not yielded encouraging results in the past and may again fall short of expectations.
Ironically, the current amnesty scheme comes in the wake of the FBR exceeding its eight-month tax collection target by Rs.268 billion that was made the basis of the reduction in prices of petroleum products and electricity by the PM lately. The question, therefore, could be legitimately asked about the need of bringing about a dubious income generation exercise as the amnesty scheme. It was reported that against the original tax target of nearly Rs.3.53 trillion the FBR provisionally collected nearly Rs.3.8 trillion during the July-February period of current fiscal year. It must however be pointed out that the FBR’s performance was once again largely dependent on imports that contributed nearly 53% to the total collection which helped camouflage the weaknesses in domestic sales tax collection.
Currently, the exceeded target collection will assist in materialising the upward revised target of Rs.6.1 trillion. In the last two months (December and January) the FBR had failed to achieve monthly target but in February it surpassed the target with a slight margin of just Rs.2 billion. FBR not only achieved its assigned target of Rs.441 billion fixed for February, 2022 but also exceeded the same by Rs.2 billion as it has collected Rs.443 billion. The FBR has not revised upwards its monthly targets so far despite imposing 17% sales tax on almost every consumable item, therefore, in case it revises targets for the remaining four months of the current fiscal year, the task will become more uphill after slowdown in imports that is rated to be the main source of FBR’s tax collection.
Just talking more about tax collection, it is reported that there was no change in the contribution of various taxes to the total tax collection and indirect taxes remained a predominant source of revenue generation despite Prime Minister Imran Khan’s focus on widening the tax base. Overall, FBR collected 65%, or Rs.2.48 trillion, in indirect taxes – general sales tax, customs duty and federal excise duty which were the three main sources of indirect taxes. FBR collected Rs.1.32 trillion in income tax, up Rs.265 billion, or one-fourth, over the same period of previous year. Over Rs.188bn worth of income tax was collected at the import stage with its standing below 35% burdening people having lower payment capacity.
It is in this scenario that the incumbent government has unveiled the latest amnesty scheme that will be the third tax amnesty scheme in as many years, mostly addressed this time to industrialists by offering them to whiten their black money at 5% rate by investing in the manufacturing sector. The amnesty is part of an industrial package that also includes tax benefits for three years on acquisition of sick industrial units, besides allowing overseas Pakistanis to invest in the country’s manufacturing sector and freely take back the profits earned and the capital investment. By the look of it this amnesty scheme appears to have been prepared in haste dispensing away with the condition of submission of a summary to the CCLC and approved the submission of the summary to the cabinet through circulation.
According to the amnesty scheme the government has decided to waive 24% tax rate and another 29% penalties by allowing the people to invest their black money, giving 49% bonanza to the industrialists. An industrialist could avail the tax amnesty scheme by investing Rs.50 million. The arms and ammunition, explosives, sugar, cigarettes, aerated beverages, flour mills, vegetable ghee and cooking oil industries could avail the new tax amnesty scheme. The government has also decided to waive the requirement of only clean and white money investment in order to incentivise the people to invest in new and existing industrial units. The government has waived the applicability of Section 111 of the income tax law to allow investment of dirty money in the industrial sector.
Moreover, concessions have also been offered for the revival of sick units and the incentives for investment in industries by non-resident Pakistanis and resident Pakistani individuals having declared foreign assets, according to the documents. According to the Promotion Package for the Industry, the government has decided to offer a 5% across-the-board tax rate and immunity to the investors from the investigation about sources of investment. An investor will establish a new industrial unit through the creation of a new company to avail of the tax amnesty scheme. Similarly, existing units can also avail the facility for balancing and modernisation. It has also been decided that those companies returning a net loss in the last 3 years will be eligible to be acquired by healthy profit-making companies, which will be incentivised to adjust the sick company’s tax losses for the next 3 years.
The Industrial Package further provides that if eligible non-resident Pakistanis and the resident Pakistani individuals repatriate their declared foreign assets into Pakistan for investment into industry, they would be entitled to 100% tax credit for the next five years. A non-resident Pakistani citizen, having continued non-residential status for more than five years; or a resident individual having foreign assets declared by 31 December, 2021, will be entitled to avail the scheme. The cut-off date for availing of the amnesty scheme will be December 2022 with the condition of starting the commercial production by the new unit by June 2024. TW
Asrar Raouf is a former civil servant