Offshore accounts aren't as bad as we think

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.