Tax Evasion and Political Extortion in Pakistan
By Riaz Haq
CA
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 banks. 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. 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.
In a country where majority of the transactions, including purchase of big ticket items, are 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.
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 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 check (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 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.
