Perspective - Musings

Offshore accounts aren't as bad as we think

Updated Jun 10, 2016 02:28pm


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Illustration by Marium Ali
Illustration by Marium Ali

Why would any of the few hundred rich Pakistanis named in the list of the so-called Panama Papers need to hide their honest and legitimately earned income and wealth in a tax-free, offshore haven, when they could just as easily have kept their money at home? The only explanation to this quandary must be that all those Pakistanis named and as yet to be named in the Panama Papers are actually all well meaning, honest citizens who have made the most of a legal tax loophole to set up offshore companies. Since it is not illegal to do so, they may not have broken the law.

All accusations of them being “corrupt” are just that — mere accusations, with as yet no proof. In fact, had they kept all their hard-earned and legitimate income and wealth in Pakistan, they may have ended up in the long list of the millions of Pakistanis – rich and not so rich – who end up avoiding paying any taxes, hurting their conscience and, perhaps, also being accused of being corrupt.

Few Pakistanis pay any income tax voluntarily. At best, the state uses its authority and means to withhold presumptive income taxes on items which they consume, and which individuals are supposed to adjust and claim, when (and if) they file their income tax returns. Pakistan is a better tax haven than most countries, with less than one per cent of the population filing their income tax returns. Estimates suggest that only 20 per cent of Pakistan’s taxable income is actually collected by the government, implying that four times as much is evaded.

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According to various calculations, around six million to eight million Pakistanis earn income which ought to be taxed, but only a million actually filed their returns. As an example, data shows that there are 650,000 doctors in Pakistan and 450,000 lawyers. Yet, only 14,721 doctors (just two per cent) and 5,761 lawyers (a mere one per cent) filed their income tax returns in 2015-2016. It is not just such essential professional services which manage to avoid paying taxes, but out of the 65,000 companies registered with the Securities and Exchange Commission of Pakistan, less than 40 per cent filed a tax return. And not all of them ended up paying taxes, since many did not even declare a profit.

Only 14,721 doctors (just two per cent) and 5,761 lawyers (a mere one per cent) filed their income tax returns in 2015-2016

But that is not it. Tax avoidance is clearly illegal, is a crime, and comes under the broad rubric of corruption. However, the government has many legal and legitimate means to favour individuals and special interest groups without ever being accused of corruption, through numerous concessions and exemptions granted under different discretionary statutory rules and orders.

Just a single example will explain the importance of tax exemptions. During 2008-2012, exemptions worth 650 billion rupees were granted to various individuals, sectors and interests. In the same period, the government borrowed around 500 billion rupees from the International Monetary Fund, because it had a revenue shortfall. Moreover, from 2003 till 2007, the Pervez Musharraf–Shaukat Aziz government granted exemption to capital gains from shares traded in the stock market, when the Karachi Stock Exchange Index was booming, causing a loss of an estimated one trillion rupees! Mind you, these legal exemptions do not constitute any definition of ‘corruption’.

These numbers are just a miniscule indication of the extent of tax avoidance in Pakistan. Almost all Pakistanis end up paying some taxes whenever they send an SMS or make a phone call or use electricity (if it is available), but these forms of extraction by the state agencies are forced, not voluntarily delivered, by law-abiding citizens. These taxes are regressive, discriminatory and work against the interests and the income-earning abilities of the poor.

The Panama Papers’ squabble has impaired and postponed the need to have a proper debate about taxation within Pakistan, by focusing on the use of legitimate offshore accounts and companies, instead. By politicising issues of alleged corruption around the few hundred named in the Panama Papers, all those who have promoted public debate about an utterly irrelevant issue, have successfully shifted the discourse about substantive issues, in which tax evasion and corruption are of central importance.

This was originally published in the Herald's June 2016 issue. To read more subscribe to the Herald in print.

The writer is a political economist, and teaches at Columbia University in New York.

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Comments (13) Closed

Ashraf Jun 10, 2016 01:46pm

In our poor country where people have no fresh drinking water, no education, no justice, they are susceptible to bom blast. Where corruption, bribery and nepotism has paralyzed the government. In such a grave situation the rich people are immune to all these evil. Therefore, our poor people hate our billionaire presidents who cant even pay their taxes! No one deserves to be a president who is guilty of dishonest to his people..

Stop defending the rich.

Jumz Jun 10, 2016 01:56pm

It was never a debate about legality.. its an ethical and moral issue about the ruling class and the elites. I disagree with the writers views, two wrongs dont make a right.

Concerned Citizen Jun 10, 2016 03:21pm

Good article - it's about the society not the individuals - something needs to be fixed as a society ...

Syed Jun 10, 2016 04:10pm

Yes indeed, the furore over the Panama Papers can leave the broader situation regarding taxation in Pakistan obscured.

However, I do wonder on the accuracy of the figures cited. Take the number of doctors given, to then illustrate how few pay tax (this is regarded as important enough to be mentioned in the highlighted text in in the middle of the article again). If there really were as many as 650,000 doctors in Pakistan, then this would give Pakistan a ratio of about 300 people per doctor, a superior ratio to many developed countries!

The Pakistan Medical and Dental Council has the number of all doctors and dentists registered with it at about 205,000 ( And many of them are not practicing either because they are women married and now home-makers (a very topical issue), they have gone abroad, have retired but maintain membership, or are doing something else. So, the number of practicing doctors and dentists is much lower than 205,000, and certainly not 650,000.

Ishrat Salim Jun 10, 2016 04:22pm

Today, even the most countries have recognised the menace of tax evasion by offshore companies. Discussion are under way between developed countries on how to control this menace. The question is money trail has to established as it is not legal to send duch big amount of money through legal means.

Anarchist Jun 10, 2016 04:53pm

Off shore companies are fine as long as owners can document the money trail. Thats whats been asked of Sharifs. And thats what they have been unable to do because its an open secret how they made & laundered money (Dar's famous affidavit) to buy London properties in early to mid 1990s. If Sharifs had nothing to hide, we would have all the answers by now.

And how does tax evasion by common people justifies loot and plunder by ruling elite?

Syed Jun 10, 2016 05:03pm

The point about tax exemptions that exist in our tax system is a very valid one, as the author rightly points out. But Pakistan is not the only country in the world to have substantial tax exemptions provided for legally. This occurs in many other places. One legitimate reason is that this has long been regarded as valid way for a government to provide for a sector it feels needs support for the broader good.

A less legitimate one is that a government is “captured” by special interest groups that are powerful, a fact of political economy, here and elsewhere. How, then, to improve matters? What could help would be a media, especially the Urdu press, which actually reports regularly and loudly on the scale of exemptions and other privileges being provided by the government, especially at the time they are being legislated on. This would sear it into the consciousness of the public, and enable a matter as consequential as this to finally receive the attention that it deserves.

Sameer Jun 10, 2016 05:18pm

So the whole country should pay up so that the PM doesnt have too. My father payed 150000 annual tax when our PM filed 3000rs.

Now if the public resists we can always tax air and water.

Damaal Jun 10, 2016 08:01pm

Panama Paper is residing in London

S Zafar Iqbal Jun 10, 2016 11:19pm

It is not about off-shore accounts!
It is not about tax collection! This outrage is about CORRUPTION! Especially corruption at high places, that is devastating the nation; morally, socially and economically.

These enemies of the nation have stolen billions of dollars, and have stashed away their plunder in their foreign off-shore sanctuaries, depriving this poor and struggling nation of its meager resources.

The money needed to build schools, hospitals, and establish industries to provide economic opportunities to the people has been siphoned off into their off-shore accounts. That is outrageous!

Had so much damage been caused by a foreign power we would have been at war with them.

Those who have stolen and plundered from the nation, now and in the past, are, for all intents and purposes, the real enemies of the people and the state.

In any half-way civilized society such criminals, the enemies of people and the state, would have been rotting in jail and not ruling us.

Nabeel Jun 11, 2016 03:26am

Totally disagree with the author in this article; Who cares about offshore companies... Issue is about kickbacks & corruption as sources of funds used in these off shores. Who with the right mind will disagree to fix the tax collection by holding those accountable that don't pay....... But why to mix and muddy the situation. Panama papers is a blessing that highlighted what was hidden before. I expect intellectuals see a big picture to add value to the lives of poor people in that country hit hard by these looters and not try to camouflage with rosy and confused statements.

S Zafar Iqbal Jun 12, 2016 05:19am

When you read or hear a muted or irrelevant response to the greatest criminal heist in our country's history, which is still taking place, it reminds you of Allama Iqbal's famous couplet, lamenting our nation's :

"wai nakamee mataa e karavan jata raha. karavan kay dil say ehsas e ziyaan jata raha". Allama Iqbal

I cannot render it into poetic English, but the gist of message is that :

" How lamentable it is that we as a nation have lost all sense of loss and deprivation. And this is our greatest loss that we do not even realize that we have been deprived of --- have been stolen from us--- what were our most precious belongings." Allama Iqbal

illawarrior Jun 14, 2016 08:25am

Tax evasion is illegal, tax avoidance is just plain smart. For those who do not know the difference, tax evasion is not paying taxes that you are legally obliged to pay, whilst tax avoidance is legally structuring your affairs so as to minimise /avoid tax.