ISLAMABAD: Less than a week before its deadline, the Federal Board of Revenue (FBR) has illegally excluded income earned during this fiscal year from the scope of the tax amnesty scheme, and changed the formula for valuation of foreign assets, throwing a spanner in all the work done so far.
The development comes despite the backing extended by all stakeholders to the tax amnesty scheme that would have made it a success.
The tax machinery’s decision to bring about these changes without amending the two laws governing offshore and domestic tax amnesty schemes shake the confidence of people. It also leaves hundreds of people perplexed who have already availed the scheme, which now exposes them to the arm-twisting tactics of tax authorities.
The amnesty scheme was announced through an Ordinance on April 10, 2018, and the last date of availing the scheme is June 30, 2018.
This scheme has blessings from all stakeholders of the state, as the country desperately needs foreign exchange. Official foreign currency reserves held by the State Bank of Pakistan (SBP) hover around the $10-billion mark, and sufficient to finance barely two months of imports.
The FBR spokesman on Friday hoped that Pakistan attracts up to $4 billion through the amnesty scheme. But if the scheme is derailed, it could further complicate the government’s external sector problems.
The changes have been made under the guise of explanations given on the official website of the FBR under frequently asked questions. These two new interpretations have far-reaching implications for Foreign and Domestic Assets Declarations Schemes, which will erode the trust of people who had just started availing it after waiting for over a month.
Those who plan on filing their declarations are concerned about changes that may be made with retrospective effect by the FBR.
FBR Chairman Tariq Pasha is said to have told his close associates that the feedback given by legal and tax experts and actual declarations received suggested that the tax authority would receive a minimum Rs85 billion in taxes. However, these two changes may stop the people from filing the declarations despite the fact that they were ready to disclose their assets, said the sources.
Last week, the FBR added a new explanation in its list of questions which states, “You cannot file a declaration for the income earned during the period from July 1st, 2017 till April 9th, 2018. It is because this income would fall in the tax year 2018 and Income tax return for the tax year 2018 is not due by the commencement date of the Act or the last date of applicability of the scheme”. Therefore there is no question of this income being undeclared or undisclosed, it added.
The explanation is contrary to what the Voluntary Declaration of Domestic Assets Act of 2018 states. “Subject to the provisions of this Act, any person may make, to the Federal Board of Revenue…a declaration in respect of undisclosed income and domestic assets acquired before the tenth day of April 2018,” according to the law that the last parliament approved.
Former prime minister Shahid Khaqan Abbasi had shot down the FBR’s proposal to exclude income earned during the fiscal year 2017-18 from the scope of the tax amnesty scheme, said sources involved in these deliberations. After his departure, the same elements have now made these changes, throwing a spanner in the work, the sources said.
The last government of the PML-N had announced the tax amnesty scheme with an objective to offer one last chance to Pakistanis to become part of the formal economy after it gets increasingly difficult to keep undisclosed assets hidden due to the OECD crusade against tax evasion.
But FBR’s spokesmen Dr Mohammad Iqbal has defended the decision to exclude the income earned during the current fiscal year.
The FBR cannot apply two sets of tax rates for income earned in one year, he added. He said there was no question that the FBR would apply standard income tax rates only on the portion of income earned between April 11 and June 30.
The changes made by the FBR and new rules announced by the SBP on Friday regarding investing in government’s dollar-denominated bonds have given virtually no time to the people to respond to these changes. There are just five working days left in which the scheme can be availed.
The only way out now seems an extension of at least two weeks in the amnesty scheme through a Presidential Ordinance to allow the people to avail the scheme.
The FBR should not confuse normal income tax returns that will be filed for the tax year 2018 and it should treat the declarations of the amnesty scheme separately, said Masood Naqvi, a chartered accountant by profession and a member of the Tax Reforms Commission (TRC). Naqvi hoped that the FBR would rectify this mistake.
Assets’ valuation change
In yet another illegal move, the FBR has also introduced a new explanation about the valuation of foreign assets. The FBR has stated that for the purpose of determining the Pakistani Rupee value of the apartment the SBP-determined exchange rate of the date of filing declaration needs to be used. The FBR has cited Section 9 of the Foreign Assets Declaration Act to justify its decision.
But this will inflate the value of an asset that has been acquired many years ago.
For determination of the value of the foreign asset, Section 2 (d) is the relevant section. It states, “Fair market value means the price of foreign assets determined and declared by a declarant himself, but in no case is less than the cost of acquisition of the foreign assets”.
Section 9 is about the charging the tax and it cannot be used for the valuation of a foreign asset, said Ashfaq Tola, a tax expert and also a member of the TRC. He said many people have already filed their declarations and this new definition by the FBR was not legally tenable and will be challenged in court, jeopardising the whole scheme.
Sources said that both these explanations were not part of the set of questions that have been agreed between Finance Minister Dr Shamshad Akhtar and legal and tax experts. It suggests that the FBR is not taking the caretaker finance minister into confidence.
After the applicability of these two explanations, the effective tax rates for domestic and foreign assets schemes will be considerably higher than the rates approved by parliament. But more than the rates, it is an issue of trust that the FBR has breached again, said a legal expert.
Relief for public office holders
These are not the only two changes that the FBR has made without taking into confidence the political leadership. Earlier, the bureaucracy changed the date for public office holders from their exclusion from the scheme. The Ordinance that the last government had promulgated in April barred all those who have held public office since January 1, 2000 from availing the tax amnesty scheme.
But the law passed by parliament in May reduced the exclusion period to the last ten years, allowing public office holders during the General Musharraf era to avail the scheme.
The FBR’s electronic portal has also been facing technical hitches, delaying the filling of amnesty declarations. The FBR’s lack of preparedness for the scheme can be gauged from the fact that till Tuesday last week there was no mention of infamous but big tax havens like Luxembourg, British Virgin Islands and Bermuda on its e-portal, sources said.