Comparing US and Pakistani Tax Cheats

In addition to borrowing heavily, the US collects over 28% of the nation's GDP to support various government expenditures. As the government spending continues to grow to stimulate demand, the US national debt is ballooning, forcing Uncle Sam to pursue offshore tax cheats.

Thursday is the deadline for Americans to come clean about the money they have hidden offshore, in places like Swiss bank accounts. No one can say with certainty how much money is out there — the accounts are secret — but the hoard may be tens of billions of dollars, The New York Times’s Lynnley Browning reports.

Several thousand wealthy Americans have come forward, hoping to avoid large fines or possibly even prison. But many others are still weighing their options. The choice is clear: They can confess and pay the penalties, or gamble that they will not get caught. With the deadline only days away, tax lawyers say they are being inundated by anxious clients, according to the New York Times.

In contrast to the US, Pakistan collects only about 11% of the country's GDP in tax revenue. Farm income, mostly earned by the nation's feudal ruling elite, accounting for about 20% of the GDP is entirely exempt from any income tax under the law. Only 2.5 million of 172 million Pakistanis pay income tax. Of them, 1.8 million are salaried and paid Rs.27.37 billion in taxes during ended fiscal 2008-09, according to a report to the Senate by Minister of State for Finance and Economic Affairs Hina Rabbani Khar. The government runs large current account deficits, forcing it to beg and borrow to meet the budget needs. The budget deficit for 2008-09 was 4.3% of GDP and it is likely to grow with lower revenue amidst slowing economy in 2009-10. The tax evasion in Pakistan is estimated at Rs500 – 600 billion a year, almost half of the total tax collection of about Rs1200 billion during 2008-08. The untapped amount is almost equivalent to the country’s annual budget deficit.

In a country where majority of the transactions, including purchase of big ticket items, occur in cash, there is widespread tax evasion and a sizable informal economy. The estimates for Pakistan's underground economy vary from 25% to 50% of the formal economy. A recent World Bank (WB) report concluded that every Pakistani citizen evaded tax amounting to Rs 4800 in the year 2007-08, while the total tax evaded in the period stood at Rs 796 billion.

During the height of corruption under Bhutto-Zardari-Sharif governments in the 1990s, the size of the underground economy rose to almost 55% in 1999, by one estimate. As the military regime of President Musharraf cracked down on tax cheats, the nation's revenue collection doubled from Rs. 500 million in 2000 to to Rs. 1.04 trillion in 2007-08.

While the income, assets and taxes of the president and top government officials are publicly disclosed and heavily scrutinized by all in the US, no such transparency exists in Pakistan. In fact, tax cheating in Pakistan starts at the top. The richest and the most powerful politicians in the ruling elite pay little or no taxes, setting a horrible example for the rest of the nation.

For example, Benazir Bhutto, Asif Zardari and Nusrat Bhutto declared assets totaling $1.2 million in 1996 and never told Pakistani authorities of any foreign bank accounts or properties, as required by law in Pakistan. Zardari declared no net assets at all in 1990, the year Bhutto's first term ended, and only $402,000 in 1996, according to a report in the New York Times.

Bhutto's family's income tax declarations were similarly modest. The highest income Bhutto declared was $42,200 in 1996, with $5,110 in tax. In two of her years as prime minister, 1993 and 1994, she paid no income tax at all. Zardari's highest declared income was $13,100, also in 1996, when interest on bank deposits he controlled in Switzerland exceeded that much every week. In June 2008, a senior PPP leader and president of Pakistan's Supreme Court Bar Association, Mr. Aitzaz Ahsan, who was interior minister in Benazir Bhutto's first government, told James Traub of the New York Times that most of the corruption and criminal cases against PPP Co-Chairman Asif Ali Zardari which were dropped recently in Pakistan were justified, and that the PPP was a feudal political party led by a figure (Zardari) accused of corruption and violence. After a moment's reflection, Ahsan further added, “The type of expenses that she had and he has are not from sources of income that can be lawfully explained and accounted for.”

It was only in 2007 that President Asif Ali Zardari returned to Pakistan under an amnesty, euphemistically called National Reconciliation Ordinance (NRO), sponsored by the Americans. However, the Americans know that the corruption charges against Zardari were credible and he, along with his late wife, was convicted in at least one case by a Swiss judge. The conviction was under appeal in Switzerland when Pakistan government withdrew all charges pursuant to the NRO signed by then President Musharraf under pressure from the Americans.

There have been widespread complaints in Islamabad, including by Finance Minister Shaukat Tarin, that the government had solutions to improve the power output but was refusing to implement them in order to benefit a handful of power plant operators, such as those supplying rental power at exorbitant rates, while the IPPs are not being paid for supplying power from currently underutilized installed capacity. Requests for information by Transparency International Pakistan regarding rental power contracts have been ignored by the Ministry of Water and Power. There are widespread corruption allegations against Mr. Zardari personally who has influenced the award of the 783 MW rental power contracts to a former governor of Oklahoma and his Pakistani partner.

There are reports that Mr. Zardari is continuing to extort businesses to enrich himself and his cronies. As Tariq Ali put it in a recent article for Counterpunch, "Zardari has carried on from where he left off as minister of investment in his late wife’s second government. Within weeks of occupying President’s House, his minions were ringing the country’s top businessmen, demanding a share of their profits."

Ali continues, "Take the case of Mr X, who owns one of the country’s largest banks. He got a call. Apparently the president wanted to know why his bank had sacked a PPP member soon after Benazir Bhutto’s fall in the late 1990s. X said he would find out and let them know. It emerged that the sacked clerk had been caught with his fingers literally in the till. President’s House was informed. The explanation was rejected. The banker was told that the clerk had been victimized for political reasons. The man had to be reinstated and his salary over the last 18 years paid in full together with the interest due. The PPP had also to be compensated and would expect a cheque (the sum was specified) soon. Where the president leads, his retainers follow. Many members of the cabinet and their progeny are busy milking businessmen and foreign companies."

The PPP leadership is not alone in evading taxes. The PML leadership appears to be just as guilty. The entire Sharif family paid a nominal income tax of Rs 250,000, wealth tax of Rs 550,000 and agriculture tax of Rs 130,000, considering their vast assets and properties of at least 23 sugar and textile mills and huge agricultural land, according to the News. The tax evasion by the the Sharif family was the reason that the donor agencies giving aid to Pakistan in late 1990s insisted on publishing tax records of all lawmakers and senior bureaucrats, The News said, adding that for this reason, the donor agencies insisted on broadening the tax net to prop up government revenues.

As Pakistan faces a severe economic crisis and the current leaders appear ready to mortgage the nation's future, the chances of the ruling elite setting a good example by paying their taxes in full appear rather remote. In fact, the feudal politicians are fighting the current IMF condition for even a modest tax on farm income. The only hope for a fairer tax system and improved collection from the rich and powerful to fund education and health care lies in serious and sustained pressure on Pakistan's ruling elite from the donors and lenders, backed by the United States.

Related Links:

Zardari Corruption Probe in Switzerland

Obama-Biden Financial Disclosures

"Ahmad Rashid's War" by Tariq Ali

Revenue Collection as Percent of GDP

Pakistan's Underground Economy

Comments

Suhail said…
Riaz:

Pakistan's tax revenues are indeed small for which the following aspects need to be addressed:

1- The tax payer is a very small segment of the population, limited to industry and service sectors. These sectors are highly taxed to the extent of their becoming uncompetitive both from the points of exports and import substitution. The way taxes are recovered is by upfront deduction in the form of with holding (or advance) income tax on the revenues earned, generally much more than what is finally due after tax computations, so tax evasion is very limited and not a major issue. During Musharraf's tenure, these sectors became pretty well documented so by and large are part of the formal economy. However, to increase revenues, the government taxes these sectors more, thereby actually reducing tax revenues as businesses keep becoming uncompetitive and closing down fast. Enterpreneurs switch to trading which is by and large in the informal sector, thus spiralling a downward trend in revenue collection increasing dependence on aid and overdrafts.
2- An expansion of tax net to agricultural sector is a logical step and should be implemented too to discipline the politicians as you've said. However, this will not result in much increase in tax revenues as agricultural sector is very inefficient has low productivity. Production is not increasing as much as the costs thereby rendering agriculturists cash strapped. If proper accounting is imposed, they'll come up with little taxable earnings. The affluence you see with Pakistani rural elite is because they extract a lot from government funds when they're in power. And the rich families always remain in power because of multiple and shifting alliances. So while I agree that rural income should be taxed, it is to bring sanity into the political system by disciplining the politicians; it will not increase tax revenues substantially.
3- The only way tax revenues can be increased is by a) increasing industry and service sector outputs by adopting investment friendly policies, including lowering of taxes, and b) increasing agricultural productivity by changing its complexion to an indudtry like venture thereby bringing in investments to increase farm productivity. Tax on agriculture will then become a significant source of revenue.

I agree with your conclusion about US forcing Pakistani political elite to pay taxes as the only seemingly possible way forward, but then this becomes part of "micromanagement" that is fast becoming an issue in Pakistani media, political circles and civil society. The urban middle classes appear well set to becoming the harbinger of the campaign against US micromanagement in Pakistan, thereby once again damaging themselves as well as the country's future.
Riaz Haq said…
Here are excerpts fom a recent Op Ed piece by Maliha Khan published on Chowk.com regading the need for land and tax refoms in Pakistan:

In September, the Carnegie Endowment for International Peace reported that “Fewer than three million of Pakistan’s 175 million citizens pay any income taxes, and the country’s tax-to-GDP ratio is only 9 percent.” This is one of the lowest tax-to-GDP ratios in the world. Mohsin Hamid writes in his Dawn News Editorial that in comparison to Pakistan, “Sri Lankans pay 15 per cent of their GDP in taxes, Indians pay 17 per cent, Turks pay 24 per cent, Americans pay 28 per cent and Swedes pay a fat 50 per cent.”

The main reason behind Pakistan’s low tax-to-GDP ratio is tax evasion by the country’s elite. Federal officials, including ministers (even Prime Minister Gilani), only pay taxes on their government salaries and not on their personal assets. Although the government promises to take steps toward tax reform, it continues to dodge the issue every chance it gets.
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Recently, the Muttahida Quami Movement (MQM), a coalition partner of the PPP-led government, submitted the Redistributive Land Reforms Bill in the National Assembly. Land reform is a major potential contributor to tax reform. The bill proposed by MQM aims to “reduce the wide disparity of income and opportunity between the rich landlords and the poor tillers of the soils…” According to the World Bank, “More than two-thirds of Pakistanis live in rural areas, of which about 68 percent are employed in agriculture (40 percent of the total labor force).” Due to inequality in land distribution, there is a wide gap between landlords and peasants. Approximately 2 percent of households control 45 percent of the land. If implemented, the new bill will establish a limit on family holdings of irrigated land at 36 acres and 54 acres of arid land. Furthermore, the bill calls for the resumption and redistribution of all excess land amongst its landless cultivators, landless tenants, and small land-owners by the government, while also compensating the previous land owners.
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While the new bill specifically addresses land redistribution and agricultural development, it will indirectly play a great role in the expansion of the Pakistani tax base. In his article, “Doing Tax Reform Right: Think Big, Think Bold,” author Salahuddin Khan makes the case for “abolish[ing] all income tax and in its place introduce[ing] a gradually increasing property tax on real estate owned.” He points out that while liquid personal assets such as cash are easy to hide, real property cannot be hidden, and is therefore easier to tax. Khan also suggests incentivizing the ownership of smaller portions of land by making it “disproportionally expensive to own over certain thresholds of land.” The case Khan makes supports the undeniable link between tax and land reform. But even though his suggestions may be great, they are useless without any kind of land reform first.
Riaz Haq said…
Here's an AFP report on Pakistani tax dodgers:

ISLAMABAD — Pakistan is defying mounting Western pressure to end a giant tax dodge with fewer and fewer people contributing to government coffers, spelling dire consequences for a sagging economy.

Tax is taboo in Pakistan. Barely one percent of the population pays at all, as a corrupt bureaucracy safeguards entrenched interests and guards private wealth, but starves energy, health and education of desperately needed funds.

Less than 10 percent of GDP comes from tax revenue -- one of the lowest global rates and worse than in much of Africa, say economists.

Federal Board of Revenue (FBR) spokesman Asrar Rauf said 1.9 million people paid tax in 2010, less than the year before, despite 3.2 million being registered to pay -- itself a drop in the ocean of a population of 180 million.

As a result, Pakistan's fiscal deficit widened from 5.3 percent to 6.3 percent of GDP in 2010, the Asian Development Bank said this month, knocking 2011 growth figures to 2.5 percent and predictions for 2012 to 3.2 percent.
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This month visiting British Prime Minister David Cameron pressed the point home, saying aid increases were a hard sell when: "Too many of your richest people are getting away without paying much tax at all and that's not fair".
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The IMF last May halted a $11.3 billion assistance package over a lack of progress on reforms, principally on tax.

And despite a flurry of meetings, no new loan has been agreed in the run-up to the IMF and World Bank's Spring meetings.

An IMF review mission is due to visit on May 8. "Consensus is building, we have almost reached agreement (on reform)," one government official told AFP, but gave no details.
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What would really work, say analysts, would be scrapping exemptions that serve entrenched interests, such as a 50 percent tax discount on sugar and a gate on taxing agricultural income that largely exempts wealthy feudal landowners.

But stalemate and vested interests have made that impossible.

"There's talk of early elections. One has a brittle coalition. A lot of the reform areas that need to be dealt with have very well entrenched and powerful lobbies that are making the case against it," said a finance ministry official.

As it is, the tiny minority who contribute say they carry a disproportionate tax burden, for which they get nothing in return.

Pakistan suffers from an awful energy crisis, yet government spending on electricity subsidies last year reached just under one percent of GDP, health spending 0.5 percent and education two percent, said the finance ministry.

According to a 2009 study by the Pakistan Institute of Legislative Development and Transparency, the average member of parliament was worth $900,000 and the wealthiest $37 million.

Those figures stand against estimates that a quarter of the population lives below the poverty line and that GDP per capita stands at $2,400.

"No one trusts the government," says industrialist Mohammad Ishaq, former vice president of the chamber of commerce in the northwestern province of Khyber Pakhtunkhwa.

"Without social welfare and with this corruption, nobody is ready to pay tax... in return one gets nothing -- no health, education, social security."

Eunuchs have been appointed tax collectors in Karachi, the financial capital, on the understanding that a visit from the maligned transgender group would embarrass people into paying up.

But former finance minister Salman Shah said tax evasion was inevitable because of corruption within the FBR, which employs 23,000 people nationwide.

"There's a big mistrust of the tax authority itself. That's why a self-assessment scheme came in," said Shah.
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Riaz Haq said…
Here's an excerpt from Express Tribune on FBR's efforts to collect taxes:

In an effort to document black economy in phases, the government has decided to gradually enforce the condition of declaring national tax numbers or identity card numbers at the time of bulk purchases.

In this regard, the Federal Board of Revenue (FBR) has amended existing rules and added a chapter to Sales Tax Rules of 2006. According to a statutory regulatory order issued here on Friday, the condition will gradually be enforced from March to July this year.

In the first phase beginning March 1, all manufacturers, importers and exporters have been asked to make minimum 60% of their sales to identifiable persons having either sales tax registration number, national tax number (NTN) or computerised national identity card (CNIC).

While there are no official estimates of the size of the black economy, independent experts and former tax officials put the figure in the range of 50 to 60% of the total size of formal economy. For the current fiscal year, the projected size of national economy is Rs21.04 trillion, according to the finance ministry.

The government had earlier tried to enforce the NTN/CNIC condition from July 2011 but fierce opposition from businesses forced it to defer the plan to January 2012. Now, it has decided to fully implement the much talked about condition by July this year.

An official of the FBR said the purpose of gradual implementation was to facilitate the industry and now this condition would also be applied to the sugar industry, which had earlier been granted exemption.

However, retail supplies will remain exempted. According to the notification, manufacturers-cum-retailers and importers-cum-retailers making retail sales to unregistered persons will not be required to provide CNIC number or NTN to the extent of retail sales, which will be separately shown in sales tax return.

The notification further states that provisions of the newly added chapter will be applied to registered manufacturers, importers and exporters while making taxable, dutiable or exempted supplies to unregistered persons.

The FBR has asked all registered manufacturers, importers and exporters to issue an invoice containing NTN or CNIC number of the buyers. The sellers will be bound to declare 60% sales to identifiable persons in March. In April, the ratio will increase to 70%, in May 80%, June 90% and in July all sales will be made to identifiable persons only.

Currently, only 146,000 traders have sales tax registration numbers while less than 100,000 regularly file returns.

Penalties

The notification states that if any registered person gives an NTN or CNIC number, which is not verified from the FBR’s database or database of the National Database and Registration Authority (NADRA), such person will have to pay a penalty of Rs5,000 or 3 per cent of the amount of tax involved, whichever is higher. The amount would be considered as arrears against the supplier.

Furthermore, all payments of the amount for transactions will be made by the buyers through bank instruments.


http://tribune.com.pk/story/341397/netting-black-economy-manufacturers-to-identify-bulk-purchasers/
Riaz Haq said…
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.

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