The many amnesties of Naya Pakistan

“First they steal money then introduce tax amnesty schemes. Such schemes are created to benefit the corrupt. Only corrupt elements become the ultimate beneficiaries. This is to fool the honest people of the country and encourage corrupt elements to plunder and amass wealth, only to whitewash it later on”.

Imran Khan

By Mohito

All governments in the recent past when facing economic slowdown have introduced amnesty schemes to kickstart the economy. The result has always been the same. The promised fruits failed to materialize. It is ironic that in PTI’s short tenure of three and a half years, Prime Minister Imran Khan despite his distaste of amnesty scheme as obvious from the above quote introduced three amnesty schemes through presidential ordinances.

Asset Declaration Scheme 2019

May 14, 2019

The President of Pakistan promulgated the Asset Declaration Ordinance 2019 on 14th May 2019 offering the people 45 days (till June 30) for declaration and whitening of undisclosed assets, sales, expenditure and Benami assets at nominal tax rates.

The scheme was announced two days after the staff-lever agreement with IMF was reached by the government for the $6 Billion Extended Financing Facility (EFF) to implement “ambitious structural reform agenda” over a period of 9 months. The amnesty scheme was discussed in the staff level negotiations and IMF had grudging given a nod to it according to Teresa Sanchez, IMF’s country representative “...we were not happy about it at the time, we said OK, because we saw it as a targeted attempt to facilitate the implementation of the Benami law””

The scheme allowed whitening of assets within country and abroad (with the exception of real estate) after paying a nominal rate of 4%. The whitened cash assets will have to be kept in Pakistani bank accounts. To continue keeping the cash abroad, a rate of 6% will be applied. In case of real estate, its value will be considered 1.5 times the FBR assigned value (or DC rate in case FBR assigned value isn’t available) before applying the nominal rate of 4% for whitening.

On national TV, businessman Aqeel Karim Dedhi asks the PM if the scheme can be extended such that people can declare there assets by the deadline yet the payment of the 4% tax can be made later. It was also reported in the press that businessmen are approaching PM for extension as the scheme was announced in Ramzan which does not leave that many working hours at the FBR office and the banks to complete the decaration. PM replied that it leaving things until the last minutes appears to be a Pakistani trait but he is considering it and is discussing with Shabbar Zaidi (Chairman FBR) and Abdul Hafeez Shaikh (Adviser to PM on Finance) that people can register by June and make the payment later. He added, “In the next 48 hours, we will bring a programme”. This statement took everyone was surprise as apparently there was no discussion with respect to his.

June 28, 2019

FBR informed the reporter who reached out to them that they oppose any announcement of an extension as it would break the momentum of the declarations.

IMF also expressed its displeasure over the extension with IMF’s Sanchez saying that “The IMF is not in favour of tax amnesties... [as an amnesty or an extension of it] will certainly not help at all because it is inconsistent with the whole package”. The country’s case case was to be discussed at IMF Board meeting on July 3 and this last minute talk of extension in amnesty was putting it in jeopardy. IMF’s Sanchez added, “I hope they are not going to do it. It’s not going to work”. She emphasised that “But no extension is needed. People have already had a chance to declare their assets for this purpose, an extension will not serve any purpose.”

What is unfortunate is that the amnesty scheme already had accounted for late payment. If the people declare their assets by June 30 but delay the payment of the tax, they will have to pay a surcharge on the delayed payment based on the following table. Hence, there was no need for announcing an extension.

June 29, 2019

Chairman FBR issues a statement “No extension is being provided in the Asset Declaration Scheme.”

Source: KPMG

June 30, 2019

In a post budget press conference, Adviser to PM Abdul Hafeez Shaikh said that the government had decided to extend the scheme till July 3.

July 3, 2019

As a IMF Board meeting was to be held today and Pakistan had extended the deadline despite IMF voicing its opposition to it, FBR Chairman explained that technically it was not an extension as June 30 and July 1 were a bank holiday. However, this meant that the extension should have been till July 2 but the extension was till the end of working hours on July 3. Apparently, the scheme ended in Pakistan before the start of office hours in US where the board of IMF was to meet to approve the $6 Billion EFF.

The IMF Executive Board approved the $6 billion EFF. In the letter of intent dated June 19, 2019, Reza Baqir and Abdul Hafeez Shaikh commit to not granting further tax amnesties.

Assessing the Amnesty

Around 137,000 people declared their assets under the scheme earning a revenue of Rs.70 billion for FBR and whitening Rs. 3 trillion worth of assets as per Abdul Hafeez Shaikh.

Was it a successful scheme? We can compare it a similar scheme announced by PMLN at the end of its tenure. That scheme realized a revenue of Rs.124 billion from 83,000 new tax payers and whitened Rs.2.5 trillion of assets. It should be noted that at the time of PMLN scheme, Imran Khan threatened the potential beneficiaries to stay away from the scheme as he would put behind bars those who avail the scheme.

Construction Amnesty Scheme 2020 April 17, 2020

This was introduced by President of Pakistan through another ordinance. What is novel about this scheme as that instead of getting people to declare assets like the earlier amnesty scheme, this granted amnesty in exchange for engaging in construction. Thus, the declared asset wouldn’t remain as dead capital in the bank rather it will be used to create employment and generate economic activity. The incentive was in the form of very low tax rate and as such, one need have undeclared wealth to benefit from the package. Even those with documented wealth could benefit from the scheme by registering their project under the scheme. The developers and businessmen appeared on talkshows and declared it “best

amnesty in the history of the country”, “a game changer”, and a “development second in significance only to independence of the country.”

In brief, the scheme was available for any project new or existing that was registered with FBR before Dec 31, 2020. The projects would have to be completed by June 30, 2022 thus the scheme offered a very short window of 2.5 years to complete the project. The incentive was that the tax payable on the project was fixed at a very nominal rate based on the area of the housing unit regardless of its price (e.g. Rs.80/Sq ft. for a flat measuring less than 3000 sq.ft. in Karachi). This prevented FBR from probing the books of the builder for assessing the tax. Secondly, FBR was prohibited from inquiring about the source of cash the builder invested in the registered project.

There was also an amnesty for a buyer of the housing unit in the registered project as long as the buyer is buying the unit in his own name and completes the payment of the apartment by September 2022.

Surreptiously another clause was also introduced in the scheme which allowed the seller of house (less than 500 sq. yds) or a flat (less than 4000 sq. ft) to avoid any capital gains tax as long as the unit was being used for personal accomodation and utility bill was in the name of owner. This was a head scratcher as this step did not raise any revenue for FBR nor generated any economic activity. There was no reason for this to be included in the amnesty.

Like clockwork, the same Pakistani traits began to manifest that the PM IK hinted at as the deadline of amnesty approaches.

Dec 26

Electronic media reports that amnesty has to be extended due to various delays and bottleneck, Rs.1.3 trillion projects wont be registered if the amnesty isnt extended.

Dec 28, 2020

The newspapers report that Chairman Association of Builders and Developers (ABAD) saying that 500 projects will be registered by Dec 31 with total project value of Rs.600 billion. Another 300 projects are pending in Sind and once those projects are approved, another Rs.600 billion of investment will come online if an extension can be granted

Dec 30, 2020

In contrast what the electronic media is reporting or Chairman ABAD is saying, FBR reports that only 183 project with estimated cost of Rs.96 billion were registered that fulfilled all requirements. There are another 147 which were submitted temporarily with FBR with an indicative investment of Rs.25 billion. In addition, there were another 218 projects worth 88billion in draft stages according the FBR official i.e., only existed on paper or may be not even that.

If we sum up the registered, temporarily registered and projects that exist only in draft stages, the total volume comes to around Rs.209 billion which is a far cry from Rs. 1.37 trillion.

Jan 1, 2021

PM announced extension in scheme for another six months. He also stated that projects worth Rs.186 billion have been registered with FBR and the projects in the process of registration amount to Rs.116 billion. A break down was not provided on how many were existing projects and how many were new projects. According to the FBR, the government has extended tax amnesty, the most controversial part of the package, for investors — builders and developers — for another six months to June 30, 2021 and the deadline for investors to complete their projects registered with the FBR under the package has been stretched to September 2023.

Reportedly IMF wasn’t pleased but the government impressed upon it that extension of the scheme is required due to the slowdown brought by Covid-19 lockdowns.

Jan 22, 2021

The extension in the amnesty is formalized when President Alvi approved the ordinance. The ordinance has been promulgated 48 hours before the start of the National Assembly and Senate sessions.

March 24, 2021

IMF prepared the staff report of second, third, fourth and fifth review under the EFF and mentioned that Pakistan missed the benchmark on avoidance of further tax amnesties. In the letter of intent attached to the report dated March 9, 2021, Abdul Hafeez Shaikh and Reza Baqir commit to not granting further tax amnesties.

June 13, 2021

Finance Minister Shaukat Tarin states in a press conference that IMF has been requested to extend the scheme for another 6 months till December 31, 2021.

The construction amnesty scheme ends. Most likely IMF did not agree to extension in the scheme or it could be that the government didn’t want to further antagonize the IMF. The sixth review of IMF $6 billion Extended Fund Facility had been postponed from July 2021 to September 2021 as IMF remain unsatisfied over implementation of prior conditions and achievement of structural benchmarks.

Assessing the Amnesty

In the absence of detailed data, we are left to rely with the FBR statistics.

As per FBR, 1,083 projects worth Rs340 billion have been registered with the FBR along with another 292 tentative projects with an indicative investment of Rs43bn till May 2021.

FBR does not provide breakdown of how many of the 1,083 projects are existing projects and new projects. Similarly we do not know the about the Rs.340 billion registered projects that how many are existing projects and how many are new projects that came online solely on account of the amnesty. While there is no doubt the construction amnesty led to increase in construction activity as noted by increase in consumption in cement and steel during the time construction amnesty was available, however, in the absence of more detailed numbers about the type of projects (new or existing), number of projects completed, type of units built etc., it is hard to measure the effectiveness of the scheme. Moreover, at the same time, SBP was also aggressively pushing construction financing by giving targets to banks for the deployment of construction financing and housing finance as well as providing subsidized mortgages. From cement and steel sales data which is usually cited to show the success of the scheme, it is hard to untangle the impact of amnesty, SBP construction targets and GoP’s subsidized mortages.

To wit, FBR list of the approved projects 2021329153317664ProjectsRegisteredundersection100DoftheIncomeTaxOrdinance.pdf (fbr.gov.pk)under construction amnesty includes Le Paris Gujranwala. As this paper has covered, the scheme is illegal and doesn’t exist. The question then arises that how many other such schemes are registered under the amnesty and of the Rs.340 billion reported for registered projects, what is the realistic number.

The list of approve project also includes FGEHA Chaklala Heights - a project for federal government employees housing. FGEHA has been undertaking similar projects for federal employees for a long time. The amnesty may have helped the builder avoid taxes but it is not clear that the apartments would not have been built in the absence of amnesty. Moreover, based on the price list on the website, it is obvious that the tax benefits to the builder have not resulted in lower price for the federal employees. Based on the price list available on FGEHA website Chaklala Heights Rawalpindi 1.pdf (fgeha.gov.pk), the sellout value of the project comes to around Rs.17 billion which is almost equal to 5% of Rs.340 billion reportedly approved by FBR. Thus the construction amnesty benefited the builder of the project who would have constructed the building anyway by lowering his tax bill.

The list also includes Grove Residency, which is a project being developed by Dolmen Group in Karachi. When the project was announced, the lowest priced unit was announced at Rs.37.5 million with the project having around 400 units. This makes the sell out value of the project around Rs.15 billion which is 4.4% of the Rs.340 billion. Under SBP’s construction financing push, HBL Islamic Banking also offered mortgage financing on the project and still approving mortgages under Roshan Apna Ghar scheme as per HBL website.

While there can be no doubt that construction amnesty led to employment generation and economic activity, without more granular data, it will hard to verify the Rs.340 billion number cited as well as to disentangle the exact impact of construction amnesty from the SBP and GoP schemes.

Industrial Amnesty Feb 22, 2022

IMF published the staff report In February 2022 for the sixth review of EFF. In the appended letter of intent dated December 17, 2021, Shaukat Tarin and Reza Baqir, reaffirmed the commitment to not granting further tax amnesties in writing.

March 1, 2022

Afew weeks after the publishing of the aforementioned IMF report, on March 1, 2022, the the Federal cabinet through circulation approved the Promotion Package for Industry (PPI) by promulgation of yet another ordinance by the President. The amnesty offer three main offerings. One, 5% tax rate on undeclared source of investment for setting up new industry or carrying out balance and modernization of existing industrial unit provided the unit starts commercial production by June 30, 2024. Two, a profitable company an acquire a sick industrial unit which has been making losses in last 3 years and adjust the tax losses of the sick unit for the next years. Three, those who will repatriate their declared foreign assets for investment into industry, they are entitled to 100% tax credit on the profits of the industrial unit for next five years.

March 4 to March 24, 2022

By now, IMF has had enough. The IMF isn’t convinced of the government’s justification of the amnesty scheme. The talks on the seventh review of the $6bn Extended Fund Facility started on March 4. Talks were originally targeted to be completed by March 14 but were extended as differences remained. IMF was not convinced with the justification for the amnesty. Reportedly IMF staff mission was completely dissatisfied with the arguments advanced in favor of the amnesty scheme.

April 4, 2022

After the dissolution of the national assembly on April 3, IMF stated that it will onll continue the program (the seventh review) once the new government is formed.

Assessing the amnesty

We have already covered that tax incentives for foreign investment cannot compete with the rate of returns offered on the Naya Pakistan Certificates.

Industrial investments are intensive undertakings both in terms of capital (material, labour and financial resources) as well as the personal time the industrialist has to devote to setting up an industry. An industrialize decides to make such an investment when he has certainty of commensurate return from the endeavor. The current political turmoil as well as rising inflation and rapidly devaluing rupee has taken away any certainty there was in the economy. It is unlikely that there will be any significant take up of the industrial amnesty till the matter are resolved. n