In Pakistan, new tax chief plans to get evaders to pay up

ISLAMABAD, Pakistan — The man hired to go after a nation of tax evaders jabs his finger at his laptop screen as he scrolls through a database of wealthy Pakistanis and dissects their spending habits.

He stops at the name of a rich man from Peshawar.

Everything’s there, Ali Arshad Hakeem says: the man’s photo, his home in a posh Peshawar neighborhood, his frequent trips to Abu Dhabi, his BMW and a bevy of bank accounts.

“We have the universe; now how do we use that universe?� asks Hakeem, Pakistan’s new Federal Board of Revenue chairman. Hakeem answers his own question. “My approach is to give them an offer.�

Hakeem has the Sisyphean task of overhauling Pakistan’s broken income tax system, and he claims to have the remedy. He is asking parliament members — a majority of whom are believed to evade taxes themselves — to approve a national amnesty wiping the slate clean for millions of Pakistanis who have never paid a rupee in taxes, if they agree to a one-time payment of 40,000 rupees, about $420. Then, in 2013, they would have to file a return and pay whatever income tax they owe: for example, about$11,100 on a taxable income of $56,000.

If they ignore the offer, he says, the government will suspend their national identity cards, which are needed to travel abroad, maintain bank accounts and buy or sell property. That penalty probably would apply to people who continue to evade taxes after the amnesty ends, Hakeem’s aides say. He will also disclose the names and assets of tax evaders in newspapers and on the Internet, he says, and he will push for legislation that rewards whistle-blowers who finger tax cheats.

It’s a controversial approach, experts say, and one that critics say provides an easy way out both for individual and corporate tax cheats. Yet it is one that many believe is desperately needed in a country where less than 1% of the population pays income taxes. A host of ills hobble Pakistan, but at the top of the list is the country’s inability to generate tax revenue. Pakistan’s tax collection record is one of the world’s worst. No one has been prosecuted for personal income tax evasion in 15 years, Hakeem said.

With revenue flow at a crawl, the government relies heavily on Western financial aid and bailouts from international lending institutions. Pakistan is due to repay $7.5 billion of what it owes to the International Monetary Fund by 2015, and so far has paid back less than a third of that amount. The government’s overall debt earlier this year stood at about $130 billion, roughly 60% of its GDP.

Pakistan’s reluctance to tackle tax reform hasn’t gone unnoticed by Western leaders, who have warned Islamabad to address the issue or risk losing its lifeline. A Congressional Research Service report released in April cited Pakistan’s 9% tax-to-GDP rate as one of the lowest in the world. “For most observers, this represents what essentially is mass tax evasion by the country’s economic elite,� the report says.

Hakeem, 49, was appointed in July, after a four-year stint as head of the National Database and Registration Authority, the agency that issues the national identity cards. He says his prime target is Pakistan’s moneyed upper crust: owners of sprawling two- and three-story marble-floored homes kept white-glove clean by teams of servants.

Among them are ministers and politicians, the very people responsible for enacting and executing laws aimed at fixing the system. A 2010 study by the Pakistan Institute of Legislative Development and Transparency, an independent think tank, reported the average worth of a Pakistani lawmaker to be about $850,000, while the richest lawmaker’s assets topped $34 million.

According to a study released Wednesday by Pakistani investigative journalist Umar Cheema, two-thirds of Pakistan’s federal lawmakers and more than 60% of the Cabinet did not file income tax returns in 2011. One senator, Mushahid Hussain Sayed, paid less than $1 in income taxes in 2011, Cheema says. The report also says President Asif Ali Zardari did not file an income tax return last year, though it adds that an aide said the president did file a return.

“The problem starts at the top,� the report states. “Those who make revenue policies, run the government and collect taxes have not been able to set good examples for others.�

To track down cheats, Hakeem and his team of young computer experts have combed a variety of national databases to form individual spending and income profiles. One of those experts and a top aide to Hakeem, Samad Khurram, says previous tax amnesties in Pakistan failed because the government had no idea who the tax evaders were.

“Now we know them, their children, their wives, where they travel, what cars they use,� Khurram says. “We’re saying, ‘We know you, we’re coming after you, and if you don’t pay, we do this….’ That’s not an amnesty — that’s a threat.�

Hakeem’s goal is to raise the number of registered taxpayers to 3.7 million from 768,000 in the next few months. Pakistan’s national election, slated for spring, is forcing him to move fast. He was appointed by Zardari, and if the president’s ruling Pakistan People’s Party is ousted by voters, a new government could step in and shelve his plan.

“That is a curveball,� Hakeem says of the election’s timing. “My horizon is limited, so I want to bring these things quickly.... I’m going to turn this into a very ruthless department.�

Critics of Hakeem’s plan say tax amnesty is far from a ruthless approach. Hafiz Pasha, a leading economic analyst and a former finance minister, says the better way is to muster the political will to prosecute tax evaders, particularly corporate tax cheats, a subset that Pasha says represents a much larger chunk of the potential tax revenue pie than individual taxpayers.

Hakeem’s aides disagree that corporate evaders pose a larger problem and say Hakeem will focus on companies after addressing the problem with individuals.

Pasha contends that Hakeem’s program “will lead to a situation where, in the future, people will say, ‘Why should we pay; we’ll just wait for another amnesty.’ The elite do not pay taxes, and it’s just a way for them to convert what they’ve made over the last few years from black to white.�

Suspending an individual’s national identity card probably won’t hold up in court, Pasha adds, unless government lawyers can prove that the individual is a tax evader.

“The Supreme Court would throw it out in five minutes,� Pasha says. “You can’t violate people’s rights like that. If you have foolproof evidence, confront them. Throw the book at them. But presumed evidence — like the number of times you travel or the number of cars you own — that’s not an indicator of income.�

Hakeem says he has to innovate because the previous approach on tax evaders has been stymied by corruption. Tax collectors and other government officials haven’t initiated cases because wealthy Pakistanis paid them off.

Hakeem says he has fired “quite a few� workers in his agency’s income tax division, but adds, “I can’t fire everyone in the tax collection system. So I’d like to take the other approach — use technology, get the low-hanging fruit, and increase the [tax] base…. Obviously, there will be hiccups. But eventually we will get it right.�

[email protected]