A roadside money changer arranges stacks of Pakistani rupee coins in Karachi, Pakistan, on Thursday, Dec. 14, 2017. Pakistan’s rupee weakened to a record low after the central bank continued to ease its grip on the currency amid mounting economic pressure and speculation that the country may need International Monetary Fund support. Photographer: Asim Hafeez/Bloomberg

Pakistan to Profile Citizens to Combat Rampant Tax Avoidance

(Bloomberg) -- 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tax amnesty plan resulted in just 0.3 percent of 3 million traders registering with the tax authority before it was withdrawn in April.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.

Rupee Devalued

In December, the central bank allowed the rupee to fall by about 5 percent against the dollar after the IMF and investors said it was overvalued. Abbasi said he didn’t see any need for a further devaluation before the elections.

Faced with such macro-economic challenges, the proposed amnesty plan will be little more than a pre-election slogan, according to Vaqar Ahmed, the deputy executive director at Sustainable Development Policy Institute in Islamabad.

“You basically give blanket amnesties and your goal is raising the number of taxpayers, whereas the target has to be tax-to-GDP ratio,” Ahmed said. “That’s why they fail.”

Five years ago, GDP growth was less than 3 percent -- it’s now around 5 percent and in the financial year starting July “we will achieve 6 percent-plus growth rate,” Abbasi said. The government "has done well despite political difficulties and instability."

©2018 Bloomberg L.P.