Pakistan Tax Collection Project Suffers Setback

[Riaz Haq]

In yet another egregious example of  increasing judicial activism, Islamabad High Court's Justice Shaukat Aziz Siddiqui, the judge who also ordered Musharraf's arrest, has suspended Pakistan's top tax collector Arshad Hakeem. Hakeem was working on an ambitious technology-based project to go after powerful tax dodgers in the country.

In a country where the rich and the powerful pay little or no tax, Ali Arshad Hakeem became "a hated man" in just seven months after his appointment as FBR chairman, according to a report in the UK's Telegraph newspaper.  Coming from IT and business management background  Hakeem put in place a database designed to monitor the spending habits of millions of people, and calculate how much tax they owed.
At the click of a mouse, he could look up details of the elite's holiday habits, electricity bills and bank accounts, complete with photos, addresses and vehicle details, said the newspaper.

By linking government databases on cars, imports, exports and sales tax among others, he built a powerful tool for the Federal Board of Revenue (FBR) that could identify individuals and companies which were not paying their fair share. For income tax, his team fed 1,700 factors into a model which calculated how much was owed.

Pakistan tax-gdp is among the lowest and its tax policies are among the most regressive in the world. Direct taxes make up less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society coupled with governance issues at Federal Board of Revenue, according to former finance minister Shaukat Tarin. The bulk of the tax receipts are collected in the form of sales tax, placing the heaviest burden on the lower-income people who spend almost all of their income on their basic needs.

 Hakeem's efforts to change the situation and collect from the rich and powerful came to a grinding halt last month when Justice Siddiqui suspended Mr Hakeem for alleged violations of appointment rules.

Other damaging examples of economic judicial activism include cancellation of Pakistan Steel Mills privatization, annulling of Reko Diq mining contract and voiding of rental power deals with foreign investors.

Since the cancellation of Pakistan Steel Mills privatization deal in 2006, PSMC has suffered huge losses that cost the taxpayers tens of billions of rupees--Rs 26.5 billion in 2009,  Rs 11.5 billion in 2010, Rs 11.4
billion in 2011 and Rs 21 billion in 2012. Had Prime Minister Shaukat Aziz's government been allowed to proceed with privatization in 2006, the PSMC would have been a significant contributor to the national exchequer rather than a huge drain on the public treasury.  The money saved could have been used to fund education, healthcare, energy and infrastructure projects in the country.

Similarly, the Supreme Court has intervened and scared away foreign investors by its decisions in Reko Diq and Karkey rental power company. Had Reko Diq been allowed to continue, it would have represented a huge $3.3 billion foreign investment in Pakistan's Balochistan region.

Umar Cheema, a journalist and author of the report that showed how few politicians pay tax, told Telegraph's Rob Crilly that anyone attempting reform risked being brought down.
"He made people realize the FBR was doing something under his watch, even though he was not there for very long" he said.

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[Riaz Haq]

Pakistani tax officials said they arrested two executives employed by a local arm of computer giant Hewlett-Packard Co. HPQ -1.09% on suspicion of corporate tax evasion.

Arrests are a preliminary step in Pakistani legal proceedings. The two were detained following a raid on offices of a large Pakistani computer seller that found records that allegedly indicated equipment wasn't properly taxed.

The officials indicated the tax evasion accusations could be expanded after further investigation. They said many of the allegedly untaxed goods could not have been brought into Pakistan without the knowledge of customs authorities.

Tanveer Malik, director of intelligence and investigation for the country's Federal Board of Revenue, said Shahid Ali Khan, H-P Pakistan's country general manager for printing and personal systems, and country controller Salim Rawjani were arrested in Karachi after the agency received "overwhelming evidence" of wrongdoing.

Efforts to reach Messrs. Khan and Rawjani were unsuccessful.

Mr. Malik said the government agency "found no evidence" of the U.S.-based company's involvement in the alleged wrongdoing.

"We have no comment at this time, other than to say that H-P adheres to the highest ethical standards," a spokeswoman for H-P in California said.

Mr. Malik said the arrests were tied to an investigation that began with a February raid on the warehouse of Advance Business Systems Pvt Ltd., one of Pakistan's largest computer systems distributors. ABS could not be reached for comment.

Records seized during the raid eventually led to charges being filed against ABS management for sales tax evasion, he said. "The evasion was done by under-invoicing the products," Mr Malik said.

He said the probe led to Dell Inc. and H-P's Pakistani units, which were asked to provide records and details of their transactions with ABS.

"Dell replied promptly and gave us full compliance," Mr. Malik said. H-P Pakistan managers declined to share information, he said.

A Dell spokesman said it complies with laws and regulations in all jurisdictions and cooperates with law enforcement when necessary.

http://online.wsj.com/news/articles/SB10001424052702303532704579481...

[Riaz Haq]

Mass tax avoidance chokes #Pakistan economy - http://FT.com http://on.ft.com/1eOItqc via @FT

As an industrialist in Pakistan’s southern port city of Karachi recounts his woes, from frequent power cuts to a shortage of trained workers, his accountant barges in with a question.
“Sir, how much should we earn from the farm this year?”

“Let me see how much we need to earn from the farm and get back to you,” the industrialist replies.
The encounter provides a glimpse of one of Pakistan’s toughest economic challenges: reforming its chronically dysfunctional tax-collection system.
Only about 0.5 per cent of Pakistan’s 200m people pay income tax, compared with 2-3 per cent in India and 20 per cent in China, according to the OECD.
Compliance with income tax payments is so poor in parts of the country that the cost of running local tax offices exceeds the tax they collect.
“Frankly, the government could end up saving money in some of our remote areas if the tax offices there were shut down today,” says one government official.
The problem has not been solved by a plummeting poverty rate, which fell from 65 per cent in 1991 to 13 per cent in 2011 according to UN figures released last week.
Huge numbers of affluent Pakistanis dodge their tax by colluding with corrupt tax officials to understate their incomes, exploiting loopholes, or both.
In one of the most notorious ploys, people buy farmland — for which there is a tax amnesty — then overstate their agricultural income and understate earnings from other business interests.
The country’s parliament, dominated by landowners, has blocked attempts by successive governments to remove this loophole.
A December 2013 study by the Centre for Investigative Reporting in Pakistan reported that almost half of the country’s 1,070 lawmakers in provincial and national assemblies paid no tax the previous year. More than 10 per cent did not even possess tax numbers.

The tax problem, analysts say, risks undermining Pakistan’s recent run of good economic news.
Business confidence is on the rise, economic growth has been recovering, hitting 4.1 per cent last year, and official liquid foreign reserves have grown almost fourfold in the past year to $12.5bn. Last month the central bank cut its benchmark interest rate 1 percentage point to 7 per cent and consumer price inflation is about 2 per cent, having been stuck above 8 per cent only a year ago.
But plunging oil import costs have played a large part in the upturn. The International Monetary Fund says decisive action on taxation is needed to back up this good fortune.
“The tax to gross domestic product ratio is still very low at 10-11 per cent,” says Harald Finger, the IMF official leading discussions with Pakistan on the next instalment of a $6.6bn loan programme. “For vibrant emerging markets, this should be in the 15-20 per cent range.”
Ishaq Dar, the finance minister preparing to present his annual budget on Friday, hails the government’s early success in broadening the tax base, boasting a rise of 200,000 taxpayers since mid-2013 to a total of about 900,000.
Officials say people have been targeted for whom there was clear evidence of wealth, for example frequent foreign travel.

http://www.ft.com/intl/cms/s/0/f8e27d2a-034c-11e5-8333-00144feabdc0...

[Riaz Haq]

Loopholes in Pakistani law that facilitate tax evasion and undocumented economy, according to Haroon Akhtar Khan on Dunya News with Kmran Khan:

1. Prize bonds are bearer's certificates....can be used to launder money on which taxes have not been paid. 


2. Overseas remittances are considered legitimate tax-free income. 


3. Income can be labeled "agriculture income" which is exempt from income tax


4. Anyone with foreign passport or residency permits like iqama can falsely claim to be non-resident (Law says they must spend over 180 days abroad) whose income in exempt from taxes.

[Riaz Haq]

#Pakistan will profile citizens by #homes, #travel #lavish #lifestyle #utility bills to combat rampant #tax avoidance. https://www.bloomberg.com/news/articles/2018-02-06/pakistan-to-prof... … via @bpolitics

Pakistan will use its national identity database to build profiles of potential taxpayers in a renewed bid to broaden its tax base, Prime Minister Shahid Khaqan Abbasi said.

The plan aims to increase the number of taxpayers in a country where less than one percent of its 210 million people pays taxes. It seeks to plug leakages, encourage correct property valuation, lower individual tax rates and offer an amnesty program, Abbasi said in an interview in his home in Islamabad.

Lenders including the International Monetary Fund have repeatedly shown concern over Pakistan’s tax-to-GDP ratio of about 12 percent, which is among the lowest globally. In the past, attempts to force people to pay taxes have been met with resistance and strikes by businesses, while various amnesty plans announced -- including one eight months ago -- failed to boost revenues. Now Abbasi wants officials to build taxpayer profiles through the National Database & Registration Authority.

“We are fixing the problem with a multi-pronged strategy,” Abbasi said. “You can make money but you cannot hide expenditures. Your telephone bills, utility bills, foreign travels, credit cards spending tell you the whole story.”

Election Looms
With elections scheduled for July 15, the South Asian nation has been weathering political instability and economic stress for the past year. The nation’s current account deficit widened about 60 percent to $7.4 billion in the six months to December and foreign exchange reserves are deteriorating, prompting the finance ministry to raise $2.5 billion from global bonds and sukuk in November. A month later, the government allowed the devaluation of the rupee.

The last tax amnesty plan resulted in just 0.3 percent of 3 million traders registering with the tax authority before it was withdrawn in April. This time, the program will encourage Pakistanis to account for their wealth with a fee of 3 percent, down from 10 percent previously, Abbasi said. In another step, the government will streamline property valuation to discourage investment in the sector to evade paying taxes.

Abbasi, who became the premier in August after the country’s Supreme Court dismissed his predecessor Nawaz Sharif after a probe into his family finances, will have about five months to implement his initiatives before he hands over power to a caretaker prime minister in June.