According to Moody’s credit rating agency, the repatriation of foreign liquid assets under the recently announced tax amnesty scheme will reduce external vulnerability risk on the economy of Pakistan. It also claims that the external pressures faced by the economy are due to import of equipment and machinery for the China Pakistan Economic Corridor. The higher imports are not only increasing trade deficit, but also weighing negative impact on the foreign exchange reserves of the country. Keeping in view the opposition of the scheme by certain political parties, the success of the scheme is still doubtful. Experts believe the scheme has the potentials to reduce fiscal and external pressures on the economy and it could also work as a catalyst to stimulate the government’s efforts to introduce reforms and broaden the tax net. However, despite having positive impact on the overall health of the economy, it has limited time to achieve gains as it will expire at the end of June this year.
Moody’s believe the capital inflows as a result of the tax amnesty scheme will also ease balance-of-payment pressure. The rating agency notes that it is first ever amnesty scheme in Pakistan which will target foreign assets. Therefore, the broadening the tax base by including undeclared foreign assets will alleviate the economic woes to some extent. Pakistan is heavily taxed country in terms of indirect taxes, but the number of registered taxpayers is only 1.2 million in a country of more than 20 million. Among the 1.2 million registered individuals, not all are filers as the latest government figures show only 700,000 paid taxes. It makes Pakistan a country where tax to GDP ratio is one of the lowest across the Asia-Pacific region and the country has not been able to record a fiscal surplus for the last 25 years. The main cause of low tax collection is trust deficit between tax authorities and the potential taxpayers. The authorities enjoy unbridled powers to twist a law in their favour which makes schemes and reforms meaningless. The government should have to devise and implement a system which should be based on trust and not on mistrust. Until trust deficit remains, no scheme or plan can ever succeed. Now it is up to the government to convince the foreign assets owners to bring their holdings back to Pakistan without any fear and their assets will be safer in this country than abroad.
