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Economy

Pakistan’s tax amnesty leaves doubt as wealthy keep evasive methods

Low-income workers discover bank accounts opened in their names by the rich

Pakistan is one of the world’s worst performers when it comes to income tax collection. Less than 1% of its population of more than 210 million pays an income tax.   © Reuters

ISLAMABAD -- Aftab Bashir, a young truck driver in Pakistan, gained widespread media attention over the weekend when he came into an unexpected windfall.

Earlier this month, the country's tax officials served Bashir with a demand for 81,000 Pakistani rupees ($545) in unpaid taxes after they discovered 1.62 million rupees, or about $11,000, in a local bank account under his name. For Bashir, it was a small fortune, which he ultimately refused to accept.

"I have no idea where the money came from, and I have never seen this much money in my life," a visibly puzzled Bashir, in his early 20s, said in comments aired on television on Sunday. Nervously appearing before reporters, he added: "I have no idea when and where this bank account was created in the first place."

Pakistani officials told the Nikkei Asian Review that Bashir's ordeal is just the latest in a string of stories behind hundreds of benami accounts -- those in fictitious names -- discovered in banks across Pakistan over the past year.

News media have reported dozens of similar discoveries where hefty sums have been found in bank accounts supposedly belonging to impoverished Pakistanis. They have ranged from vegetable and fruit sellers to domestic servants and widows who had no knowledge of either the bank accounts or the deposits.

Such discoveries have prompted the country's tax officials to warn that lax enforcement of laws covering the opening of new bank accounts has allowed affluent Pakistanis armed with illegal wealth to park their funds in accounts in the names of low-income workers without their knowledge.

"The money that Aftab Bashir found in his account was more than 800 times his monthly salary," one senior government official told Nikkei, adding that "it's impossible to imagine how this one person came up with so much money."

Affluent Pakistanis have long sought to hide their wealth from the government in order to avoid paying income tax, which is roughly 21% for incomes over 4.8 million rupees. In an attempt get this prosperous class to come clean, the government recently announced a tax amnesty plan in an effort to get Pakistanis to declare unreported wealth.

Two senior government officials recently told Nikkei that it is believed wealthy Pakistanis may have stashed up to $12 billion in bank accounts, property and other assets held overseas. While Pakistan has previously conducted amnesties, tax collections have been modest and they failed to boost the number of tax payers.

Prime Minister Imran Khan's government, which is working to conclude an agreement with the International Monetary Fund for a $6 billion loan, says the latest amnesty will remain in place until the end of June.

The amnesty, according to ministers in Khan's cabinet who spoke to Nikkei, is meant to allow Pakistanis with illegal wealth to legitimize it after payment of a fee of at least 4% of the total value of cash and assets. The Khan administration is hoping to use the amnesty to encourage more people to clean up their financial records before Pakistan is forced to tighten the ways local bank accounts operate, in line with conditions likely to be imposed by the IMF.

"Once we enter an IMF program, Pakistan has made a commitment that we will not give any further space to people with illegally earned money," said one minister from Khan's cabinet who spoke to Nikkei on condition of anonymity.

"In future, if there are cases of benami bank accounts where rich people deposit money in the name of another person who is poor, there will be no opportunity for legitimizing that wealth except for whoever claims the ownership to also pay a heavy penalty," the minister added.

However, analysts say that the amnesty plan should be geared primarily at increasing the number of people in Pakistan who become regular income tax payers.

The country is one of the world's worst performers when it comes to income tax collection. Less than 1% of its population of more than 210 million pays an income tax. Senior government officials have told Nikkei that they believe up to 5% of Pakistan's population should be brought into the income tax net.

"If you are allowing people with suspicious wealth to legalize their money, then we should not just be forcing them to pay a one-time penalty," Ikramul Haq, a prominent Pakistani tax lawyer, said in an interview.

"Once people come forward to benefit from this amnesty, then you have to make certain that those people also remain in the tax net and pay a regular income tax in years to come," Haq said, adding that the country's sales tax also is in need of sweeping reforms as part of a comprehensive plan.

"We have a VAT-type tax, which is the sales tax at a rate of 17%. The rate should be scaled down to about 10% because a high rate of 17% encourages many sellers and purchasers of goods to avoid pay this tax," he said, referring to the value-added tax. "If you have a lower sales tax of no more than 10%, the incentive to steal this tax will be reduced, and I think people will be more willing to accept the lower rate and comply with it."

Though Pakistan's VAT rate compares favorably with its regional peers in South Asia -- Bangladesh has a top rate of 15%, while India's top rate is 28% -- analysts like Haq argue that a lower rate than the prevailing 17% is the only way to improve compliance across Pakistan.

Analysts warn that the future of any campaign to increase compliance with Pakistan's tax laws requires more than just another tax amnesty with the promise that it is the last such window of opportunity for people with untaxed wealth.

Shuja Rizvi, a Karachi-based senior analyst on equities and the business environment, told Nikkei that many Pakistanis over time have lost faith in their government to improve the country's overall economic environment.

"There is a very visible trust deficit across Pakistan. In that background, it's very hard to say if ordinary Pakistanis will see this amnesty as a last window of opportunity," Rizvi said. "We have had tax amnesties of a similar kind in the past, too. The most obvious question is whether this amnesty is really the last of its kind or there will be others in future, too."

Western economists in Islamabad who regularly monitor Pakistan's economic trends say that Khan's government must prove that tax evasion will be a punishable offense before ordinary Pakistanis will take the authorities seriously.

"In many other countries of the world, people who steal their tax dues will go to jail," one prominent Pakistani economist said, referring to those who cheat on their taxes by under declaring their incomes or not declaring any income.

"In Pakistan, people that I have talked to don't remember the last time when someone prominent was jailed for stealing their taxes," he said. "It's time for Pakistan to change."

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