Tax cheats get free pass if they invest in Pakistan housing

KARACHI: Pakistan is willing to forgive tax evaders if they help fund activity in the economy that shrank for the first time in seven decades last financial year, Bloomberg reported.

Authorities in Pakistan, where just 1 percent of the population file tax returns, will look the other way if people with illicit cash -- locally known as black money -- invest in construction projects such as Prime Minister Imran Khan’s flagship Naya Pakistan Housing Program by December 31, according to the Federal Board of Revenue.

“There is all this money with developers who have been doing tax evasion and small scale projects,” Zaigham Rizvi, member of Naya Pakistan Housing Program taskforce, said in an interview. “I support the decision to bring funds from the dark economy into the tangible economy. Construction will generate some sort of tax directly or indirectly if that money is put through the value added system.”

With revenue collections slowing amid the coronavirus pandemic, Khan is trying to tap illegal wealth that’s estimated to be as large as 56% of the $278 billion economy. The government this year cut the budget for development spending and has little recourse to raise money after taking bailout funds and an emergency loan from the International Monetary Fund.

Amnesty for tax cheats can help muster funds needed to spur housing activity in a nation where mortgage finance is almost non-existent. The government predicts 400 billion rupees ($2.4 billion) of home constructions will start this year, according to Minister for Information and Broadcasting Shibli Faraz.

Pakistan has forgiven tax cheats earlier as well. Four of the past governments have announced such programs at least once, but none have been successful in drawing out significant amount of black money.

Khan’s amnesty program is the first for the real estate sector as he’s in dire need of cash and ways to stoke gross domestic product, which contracted 0.4% in the year ended June. Lockdowns to slow the spread of Covid-19 -- the nation is the second-most infected in Asia -- and locust attacks, are sucking state funds.

There’s an immediate demand for 15 million homes in the country, which increases by half a million every year, according to Arif Yousaf Jeewa, former chairman of the Association of Builders and Developers of Pakistan.

Khan’s Naya Pakistan Housing Program aims to build 1 million homes each year. For investors to benefit from the amnesty they will have to register with tax authorities. Registrations began this week.

“It obviously raises questions, given the previous discussions with IMF,” which dislikes tax amnesties, said Mattias Martinsson, chief investment officer of Tundra Fonder AB in Stockholm. “These are special times and everyone understands that. Countries like Pakistan don’t have the pockets of the U.S. or European Union.”

Still, the program’s dependence on illegal cash may not be enough. Investment into homes will pick up when incentives such as cheap mortgages and tax savings for first purchase house are introduced, according to analysts.

“The priority people have is to spend on basics necessities at this point, not buying a house,” said Khurram Schehzad, chief executive officer at Karachi-based advisory Alpha Beta Core Solutions. “You need to really incentivize people to spend on houses at this point in time.”