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Too little too late on the foreign currency front

Too little too late on the foreign currency front

OBJECTIVE conditions, it seems, are ripe for the return of undeclared overseas assets owned by resident and non-resident Pakistanis, but subjective conditions are hindering the repatriation of wealth of aspiring declarants under the tax amnesty scheme.

Moody, in its recent report on Pakistan that focused on heightened external vulnerability risks, took note of the amnesty scheme. The rating agency expects the said scheme to generate around $2-3 billion in foreign exchange inflows. It is not clear which data set was used by Moody’s to base its projection. No evidence of the impact is available on the data of reserves released by the State Bank of Pakistan (SBP) last week.

On June 21 SBP released data of foreign exchange reserves which stood at $10.2bn (held by the central bank) and $6.5bn (by commercial banks), as at 14 June 2018. This adds up to total of $16.7bn, below the threshold of three months import bill coverage.

The 82-day tax amnesty scheme (April 10 - June 30) for declaration of hidden assets generated, private sector leaders confirmed, a lot of interest but the relevant institutions in Pakistan, it seems, were not quite ready to capitalise on the potential. Besides, businessmen feel the window of opportunity is too narrow in terms of time, particularly for overseas transfers, for it to deliver.

“The government should have considered the documentation requirements of high denomination cross country money movement in the West when deciding the time limit,” a businessman in Lahore commented over phone.

Despite all odds, the scheme has resulted in declaration of hundreds of billions of rupees worth of local assets that translated into an additional several hundred million rupees in taxes in government coffers. There is no evidence so far to suggest substantial foreign currency repatriation under the scheme.

The calculations and projections of former Finance Minister Dr Miftah Ismail are vindicated as far as declaration of local assets is concerned. His reading regarding hidden assets abroad also seem to be accurate but his expectation of inflows of dollars in the current fiscal year is proving to be unrealistic.

“The pitfalls of the current transformational political phase, bureaucratic lethargy, lacunas in the Foreign Asset Declaration Act 2018 and the limited time window, compromised the potential of the Amnesty Scheme,” a market watcher in Karachi said.

“Tax bars, bankers, brokers and barons threw their weight behind the scheme and came out in the public to defend it as soon as the scheme was announced.

“Bureaucrats (the Federal Board of Revenue (FBR) and finance ministry) and many self proclaimed experts were not convinced. They equated it to other such efforts in the past that failed. They lack an understanding of the transforming world and are cut off from the local reality,” commented a market watcher.

When reached over phone in Islamabad to share data on this account the tax men said they have been directed by the government not to leak any information at this point. A press report, sourced on the FBR, quoted a collection figure of Rs21bn and projected final collection by the expiry date to clock at a whooping Rs100bn.

Tax lawyers contacted in major cities expressed utter frustration with the FBR that they said has not been responsive to their satisfaction. They believe that both the SBP and the FBR took too long to digest the value of the scheme and acted very slowly despite the limited time validity. They also attributed bureaucratic lethargy in this regard to the exclusion of servicemen and politicians from the scheme.

“The tax bars across the country have been approaching the FBR, identifying gaps and lacunas in the law, demanding clarification, but to no end. The confusion is more pronounced in rules dealing with the declaration of assets outside the country. The spirit of the whole exercise has already been lost in the process,” Rashid Ibrahim, a tax consultant in Islamabad commented.

“I believe people are declaring local assets left, right and centre, but to realise the inflow of hard currency under the scheme the validity period needs to be extended,” Ibrahim argued.

The argument that the caretaker setup is not legally empowered to take a decision that necessitates an amendment in the law did not convince him. “Where there is a will there is a way. People want it and the economy needs it,” he opined.

Dr Shamshad Akhtar, caretaker finance minister was too busy to share her views on the scheme or the economy. She is said to be preparing to engage with the possible creditors to sustain reserves and pre-empt a further draw down to secure financial stability.

Tariq Pasha, chairman FBR, declined to comment on the scheme, while Dr Iqbal, spokesperson FBR sounded pleasantly surprised at the response of the scheme during a conversation with Dawn over phone. “It’s working,” he said.

“I am told by multiple tax audit firms of innumerable queries and request for interviews they are receiving from their clients and people who want to avail the opportunity,” he added.

A reputed tax consultant of Lahore was disgusted with the scheme and the robust response it received. “Pakistan has signed the OECD Convention that will become operational from Sept 01 2019. It will mandate automatic sharing of information on taxation and assets.

“What was the haste? With that information in hand the government could have negotiated a better deal. Instead of 2 per cent it could have asked for up to 30pc in tax and penalty and people would have still availed the scheme to avoid higher tax liabilities on the same assets in the West,” he commented.

“I don’t understand why the government wants to provide blanket immunity to tax evaders and avoiders? For an honest, successful person the income tax rate is 25pc but people who violated the law of the land are facilitated to whiten their hidden wealth by paying a paltry 2-5pc tax,” he argued.

“Tariq Bajwa, at one point, was quoted to have assessed the value of total assets owned by Pakistanis abroad at $200bn. The PML-Nawaz introduced the scheme to appease crooks who pretend to be tycoons. They already use all kinds of tricks to route ill-gotten money parked outside in the country. It is not an accident that 90pc of all big companies have as much as 40pc foreign stakes,” he grumbled.

Another opponent of the scheme was critical of the media that provides a platform to auditors and lawyers who fight for shady people in courts in the day and appear on TV in the evening as moral monitors to lecture. “There is something called conflict of interest. People who run the business of advising the rich to avoid and evade tax liabilities should not be invited to define rights and wrongs,” he said.

Tariq Bajwa, governor SBP, did not offer any comment but the central bank, ten days before the expiry of the scheme, did respond to multiple queries related to foreign asset transfers. Through press statements the SBP guided commercial banks and explained at length point by point issues raised by people who wish to avail the scheme to whiten their hidden wealth abroad.

Published in Dawn, The Business and Finance Weekly, June 25th, 2018

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