Moody’s says amnesty to raise one-off tax revenue by 0.3 to 1pc of GDP till June

KARACHI: US credit rating agency Moody’s Investors Service on Thursday said the one-off tax amnesty scheme announced for undeclared local and foreign assets is likely to jack up revenue by 0.3 percent to one percent of GDP till June-end, which would give a relief to the country that faces fiscal and current account pressures.

“…we expect a one-off increase in government revenue of 0.3 percent to one percent of GDP,” Moody’s said in credit outlook.

Early this week, government announced tax amnesty scheme, which would expire by June, to give residents one-off tax benefits for repatriating undeclared local liquid assets with a five percent penalty, undeclared foreign liquid assets with a two percent penalty (if repatriated, or a five percent penalty if remaining abroad or in foreign currencies), and undeclared fixed assets – whether held locally or abroad – with a three percent penalty.

The low penalty rates, particularly for repatriated assets, increase the likelihood of the scheme’s success, the credit rating agency said, adding: “the success of this scheme also depends on whether residents expect future tax amnesty schemes with similar incentives, which could lower the uptake of the current scheme.”

Moody’s said Pakistan, with less than 10 percent of tax to GDP ratio, has one of the weakest tax generation capacities in Asia Pacific and so “broadening the tax base by including previously undeclared assets would alleviate Pakistan’s ongoing fiscal pressures”.

The tax scheme targets increase in number of tax return filers from the miniscule 1.2 million. Of the total return filers, alone 700,000 paid taxes.

“Pakistan’s credit profile is consistently constrained by its weak tax revenue generation,” the agency said. “The government has not recorded a fiscal surplus in the past 25 years.”

While referring to accounting firm AF Ferguson’s estimates, Moody’s said it is the first tax amnesty targeting foreign assets estimated at $150 billion or 45 percent of the country’s economy size. Pakistan has previously launched tax-amnesty schemes for businesses and the real estate sector.

“…if successful, (the scheme) would increase the government’s revenue base and alleviate fiscal pressure from its low revenue generation capacity and increasing capital expenditures for the China-Pakistan Economic Corridor (CPEC),” it added. “Capital inflows resulting from the repatriation of liquid foreign assets also would ease balance-of-payment pressure in the past few months of the current fiscal year.”

Current account deficit widened 50 percent to $10.826 billion in the first eight months of current fiscal year, the State Bank of Pakistan’s data showed.

The credit rating agency said the repatriation of foreign liquid assets would reduce Pakistan’s external vulnerability risk, “although the positive effect would only last through the end of June 2018, when the amnesty expires”.

“Pakistan is facing external pressures, with higher imports largely from CPEC weighing on the current account and foreign reserves,” it added.

Moody’s said the central bank has allowed the currency to depreciate twice (by about nine percent in total) since early December 2017 and has raised policy rates 25 basis points to cool domestic demand. “However, foreign reserves continue to decline and reached a 34-month low in March 2018.”

The credit rating agency termed the scheme as credit-positive, which is part of the government’s broader tax reform package.