Tax amnesty could relieve pressures on economy: Moody’s

Tax amnesty could relieve pressures on economy: Moody’s

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    The government’s tax amnesty could relieve fiscal and external pressures on the economy “if successful”, said Moody’s, the premier credit rating agency in a release early on Friday. “The credit-positive scheme is part of the government’s broader tax reform package” the release noted.

    “Pakistan’s tax-amnesty scheme, if successful, 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). 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, which ends in June 2018.” It noted that “this is Pakistan’s first tax-amnesty scheme to target foreign assets”

    “Broadening the tax base by including previously undeclared assets would alleviate Pakistan’s ongoing fiscal pressures. In a country of more than 20 million people, only 1.2 million file income tax returns, of which only 700,000 paid taxes, according to the government’s latest estimate. Pakistan’s revenue-generation capacity, as measured by the ratio of tax revenue to GDP, is among the lowest across the Asia-Pacific region and among our rated sovereigns.

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

    Says scheme is ‘credit positive’

    “A successful tax-amnesty scheme would provide a one-off benefit to government revenue, and the low penalty rate for repatriated assets increases the scheme’s chance of success. Penalty rates on foreign liquid assets are similar to those in Indonesia’s (Baa3 positive) 2016-17 tax-amnesty scheme: it offered a 4 per cent penalty on the declaration of foreign assets and a 2pc penalty if those assets were repatriated. Based on Indonesia’s and others’ tax-amnesty schemes in recent years, we expect a one-off increase in government revenue of 0.3pc-1.0pc of GDP. 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.”

    “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. The central bank has allowed the currency to depreciate twice (by about 9pc 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.”

    Published in Dawn, April 13th, 2018

    Source: News

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