Pakistani Elites Must Pay Fair Share of Taxes For National Independence

As Pakistan's ruling elite and its ghairat brigade, led by PML's Sharif brothers, engage in loud empty rhetoric about infringement of their national sovereignty by the United States, here is something to ponder:
Pakistan runs chronic budget deficits of around 5% of its GDP, and its government collects less than 10% of GDP in tax revenue which is among the lowest in the world. A big share of these deficits is funded by foreign aid and loans, making Pakistanis beholden to the interests and whims of major foreign donors and lenders.

Pakistan's tax policies are among the most regressive in the world. Direct taxes make up less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society coupled with governance issues at Federal Board of Revenue, according to former finance minister Shaukat Tarin. The bulk of the tax receipts are collected in the form of sales tax, placing the heaviest burden on the lower-income people who spend almost all of their income on their basic needs.



The other major weakness in public finances is the lack of fiscal effort by the provinces. With some of the largest segments of economic activity such as agriculture, real estate, and services in the provincial domain, the provincial tax receipts total an abysmal 0.7 percent of GDP.



Farm income, mostly earned by the nation's feudal ruling elite, accounting for about 20% of the GDP is entirely exempt from any income tax under the law. Only about 2 million of 180 million Pakistanis pay income tax. Of them, 1.8 million are salaried and paid Rs.27.37 billion in taxes during ended fiscal 2008-09, according to a report to the Senate by Minister of State for Finance and Economic Affairs Hina Rabbani Khar. The government runs large current account deficits, forcing it to beg and borrow to meet the budget needs. The budget deficit for 2008-09 was 4.3% of GDP and it is likely to grow with lower revenue amidst slowing economy in 2009-10. The tax evasion in Pakistan is estimated at Rs500 – 600 billion a year, almost half of the total tax collection of about Rs1200 billion during 2007-08. The untapped amount is almost equivalent to the country’s annual budget deficit.



In a country where majority of the transactions, including purchase of big ticket items, occur in cash, there is widespread tax evasion and a sizable informal economy. The estimates for Pakistan's underground economy vary from 25% to 50% of the formal economy. A recent World Bank (WB) report concluded that every Pakistani citizen evaded tax amounting to Rs 4800 in the year 2007-08, while the total tax evaded in the period stood at Rs 796 billion.





Food prices have dramatically increased since the current PPP government took power in 2008. These higher food and commodity prices are resulting in the transfer of additional new tax-free farm income of about Rs. 300 billion in the current fiscal year alone to Pakistan's ruling party's power base of landowners in small towns and villages in Southern Punjab and Rural Sindh, from those working in the the economically stagnant urban industrial and service sectors who pay bulk of the taxes. The downside of it is an even bigger hole in Pakistan's pubic finances which is being funded with increased foreign aid and loans.

During the height of corruption under Bhutto-Zardari-Sharif governments in the 1990s, the size of the underground economy rose to almost 55% in 1999, by one estimate. As the military regime of President Musharraf cracked down on tax cheats, the nation's revenue collection doubled from Rs. 500 million in 2000 to to Rs. 1.04 trillion in 2007-08.

While the income, assets and taxes of the president and top government officials are publicly disclosed and heavily scrutinized by all in the US, no such transparency exists in Pakistan. In fact, tax cheating in Pakistan starts at the top. The richest and the most powerful politicians in the ruling elite pay little or no taxes, setting a horrible example for the rest of the nation.

For example, Benazir Bhutto, Asif Zardari and Nusrat Bhutto declared assets totaling $1.2 million in 1996 and never told Pakistani authorities of any foreign bank accounts or properties, as required by law in Pakistan. Zardari declared no net assets at all in 1990, the year Bhutto's first term ended, and only $402,000 in 1996, according to a report in the New York Times.

Bhutto's family's income tax declarations were similarly modest. The highest income Bhutto declared was $42,200 in 1996, with $5,110 in tax. In two of her years as prime minister, 1993 and 1994, she paid no income tax at all. Zardari's highest declared income was $13,100, also in 1996, when interest on bank deposits he controlled in Switzerland exceeded that much every week. In June 2008, a senior PPP leader and president of Pakistan's Supreme Court Bar Association, Mr. Aitzaz Ahsan, who was interior minister in Benazir Bhutto's first government, told James Traub of the New York Times that most of the corruption and criminal cases against PPP Co-Chairman Asif Ali Zardari which were dropped recently in Pakistan were justified, and that the PPP was a feudal political party led by a figure (Zardari) accused of corruption and violence. After a moment's reflection, Ahsan further added, “The type of expenses that she had and he has are not from sources of income that can be lawfully explained and accounted for.”

It was only in 2007 that President Asif Ali Zardari returned to Pakistan under an amnesty, euphemistically called National Reconciliation Ordinance (NRO), sponsored by the Americans. However, the Americans know that the corruption charges against Zardari were credible and he, along with his late wife, was convicted in at least one case by a Swiss judge. The conviction was under appeal in Switzerland when Pakistan government withdrew all charges pursuant to the NRO signed by then President Musharraf under pressure from the Americans.

The PPP leadership is not alone in evading taxes. The PML leadership appears to be just as guilty. The entire Sharif family paid a nominal income tax of Rs 250,000, wealth tax of Rs 550,000 and agriculture tax of Rs 130,000, considering their vast assets and properties of at least 23 sugar and textile mills and huge agricultural land, according to the News. The tax evasion by the the Sharif family was the reason that the donor agencies giving aid to Pakistan in late 1990s insisted on publishing tax records of all lawmakers and senior bureaucrats, The News said, adding that for this reason, the donor agencies insisted on broadening the tax net to prop up government revenues.

As Pakistan faces a severe economic crisis and the current leaders appear ready to mortgage the nation's future, the chances of the ruling elite setting a good example by paying their taxes in full appear rather remote. In fact, the feudal politicians are fighting the current IMF condition for even a modest tax on farm income. The only hope for a fairer tax system and improved collection from the rich and powerful to fund education and health care lies in serious and sustained pressure on Pakistan's ruling elite from the donors and lenders, backed by the United States.

To conclude this post, let me quote former finance minister who said the following in a recent op ed: "At the heart of it, these issues are related to governance. This state of affairs is a manifestation of a broader challenge that Pakistan has grappled with virtually since independence – the shifting of the burden of responsibility by a small, self-serving and venal elite to the rest of the population."

Related Links:

Haq's Musings

Comparing US and Pakistani Tax Evasion

Pakistan's Economic Performance 2008-2010

Brief History of Pakistan's Economy 1947-2010

US Raid in Abbottabad

Pakistan's Rural Economy Showing Strength

Shaukat Tarin on Pakistan's Regressive Tax Policies

Comments

Riaz Haq said…
Here's an outline of Pakistan's 2011-12 budget as published by Dawn:

ISLAMABAD: The government has finalised a consolidated budget of Rs3.854 trillion for the next financial year, envisaging a revenue of Rs2.787 trillion, fiscal deficit of Rs912 billion and provincial transfers of Rs1.224 trillion.

The budgetary allocations indicate that current expenditures of most of the federal ministries will be frozen at the level of the current year because of tight fiscal position.

Official documents available with Dawn show the government has set a tax revenue target of Rs2.1 trillion, 2.3 per cent above the current year’s revised target of Rs1.71 trillion. This includes a Rs1.952 trillion tax target of the Federal Board of Revenue (FBR) against current year’s revised estimate of Rs1.588 trillion. The non-tax revenue is estimated at Rs687 billion, up 30 per cent from this year’s revised estimate of Rs526 billion.

Of the total revenue of Rs2.787 trillion, the provinces would get Rs1.224 trillion and Rs1.513 trillion would be for the federal government.

The government had set a revenue target of Rs2.410 trillion for the current year, but it has now been revised to Rs2.235 trillion, because of a shortfall in FBR collection, non-introduction of RGST and slow economic growth.

The centre’s total expenditure has been estimated at Rs2.549 trillion, up from current year’s revised estimate of Rs2.314 trillion. The centre would extend Rs55 billion subsidies to the provinces.

The size of the federal Public Sector Development Programme has been estimated at Rs280 billion against current year’s original estimate of Rs270 billion which was brought down to Rs180 billion.

Another Rs35 billion would be spent for flood relief assistance, slightly less than current year’s Rs40 billion.

Pensions would require Rs118 billion against Rs107 billion this year. Likewise, federal government’s service delivery cost has been estimated at Rs200 billion, which is about Rs20 billion more than current year’s revised estimate of Rs180 billion – brought down from budgeted Rs221 billion.

SECURITY AND INTEREST: The government would earmark Rs495 billion for defence, about 12 per cent more than current year’s allocation of Rs442 billion. Another Rs340 billion would be made available through grants for security expenditure, up 19.3 per cent from current year’s Rs285 billion. Put together, security-related expenditures would amount to Rs835 billion against this year’s Rs727 billion, up by 15 per cent.

An almost equally a large amount of Rs786 billion would be paid as interest cost, which is about Rs60 billion or 8.3 per cent more than current year’s revised debt servicing of Rs726 billion. The government had earmarked Rs699 billion in the 2010-11 budget for debt servicing which has been revised to Rs726 billion.

About Rs50 billion would be allocated for the ministry of interior, up from current year’s Rs44 billion.

BUDGET DEFICIT: The federal government’s fiscal deficit has been estimated at Rs1.036 trillion that is expected to be reduced to Rs912 billion because of a Rs124 billion cash surplus to be provided by the provincial governments. For the current year, the government had envisaged an overall deficit of Rs685 billion (4.5 per cent of GDP) that has now been revised to Rs960 billion or 5.5 per cent of GDP. The provinces were expected to generate a cash surplus of Rs167 billion but it was revised to Rs112 billion.

The budget deficit would be met through Rs95 billion worth of grants, net domestic bank borrowing of Rs807 billion and net external borrowing of Rs10 billion.
Riaz Haq said…
Here's a report on Pakistan trying to collect taxes from middlemen (arti) on their profits:

The government has imposed a 10 per cent advance tax on commission, or brokerage fee, earned by the agents of cultivators or farmers and a withholding tax at a rate of 1.5 per cent on the sale of cotton seed, rice and edible oils.

According to new taxation measures announced by the government on Saturday, the new taxes will not be applicable to growers who sell their produce, a circular of the Federal Board of Revenue (FBR) said.

The circular stated that the withholding tax on sale/purchase of seed cotton will be deducted by withholding agents.

“The withholding agent shall not deduct withholding tax on purchase of agriculture produce which is directly sold by a grower of the produce,” the circular added.

The 1.5 per cent withholding tax is being levied on profits earned by the middlemen in the business of buying produce and selling it to the markets at higher rates.

To ensure that the withholding tax is collected, the FBR has directed that the buying agent will have to make three copies of the certificate and give one to the grower, submit the second copy in office of tax commissioner of Inland Revenue and keep the third copy for own record.._

The FBR has also issued a format for the farmers, describing their sale of sugarcane, wheat, rice or cotton to the buyer, which also explains the details of the agricultural land the produce belongs to and the date of sale.

While the circular also states that “in case sale of seed cotton or other agriculture produce is made by a grower/cultivator through a commission agent, then advance tax is collectible under section 123 of the Ordinance at rate of 10 per cent of the gross commission income of the commission agent”.

However, the farmers have rejected the new initiative of the FBR and the farmers’ associations have come up with plans to organise a demonstration in Multan on April 5.

Agriculturists have been accusing the government of adopting policies that would only hurt the small- and mid-level farmers and these measures are being taken to protect the large land owners who should be paying income tax on agriculture.

Calling the new measures as indirect tax on the agricultural sector, the President of Pakistan Agriculture Forum Ibrahim Mughal talking to Dawn said the government was bent upon destroying all the productive sectors and after imposing 17 per cent General Sales Tax on agriculture inputs including pesticides, fertiliser and tractors through presidential ordinance on March 15, 2011, the new move will have more serious impact on the overall agriculture economy.

Mr Mughal said that new measures would affect the overall agricultural sector and its productivity which would reverse economic cycle for the small and mid-level growers.

“In March government imposed over Rs80 billion taxes on agriculture sector in form of GST and advance taxes,” he said adding that around 80,000 tractors are being purchased by the growers per annum and after the imposition of 17 per cent sales tax, they will have to pay a total of Rs8 billion annually more than the earlier price.
Riaz Haq said…
Here's the Wall Street Journal report on Pakistan's 2011-12 budget:

..Finance Minister Abdul Hafeez Shaikh forecast a budget deficit of 4%, down from 6% in the current fiscal year, with economic growth rising to 4.2% versus 2.5%. In the most noteworthy new measure, Mr. Shaikh said the government was ending sales-tax exemptions on about 500 items, which will bring in fresh revenues of about 200 billion Pakistani rupees.

But Mr. Sheikh at the same time reduced the general sales tax to 16% from 17% and failed to bring in bold new measures to increase the state's haul of income tax from the country's wealthiest citizens.

"This is a business-as-usual budget. I was expecting it to be a reformist budget," said Ashfaque Khan, dean of the National University of Sciences and Technology Business School in Islamabad.
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U.S. Secretary of State Hillary Clinton, urged by the IMF, has publicly called on Pakistan in the past year to raise taxes on its richest citizens. The IMF itself has since last year withheld the disbursement of $3.5 billion in funding for Pakistan—the final tranche in a $11.3 billion loan package—due to failures to significantly raise taxes. The IMF has urged Pakistan to reform its sales tax to include services but this hasn't happened.

The World Bank and the Asian Development Bank also have suspended budget-support funding which amounts to about $1 billion.

Mr. Shaikh failed to announce announce any new measures to tax agricultural income, which remains exempt. The government says the issue falls under the purview of provincial governments. Many of Pakistan's richest people are feudal landlords who made their fortunes from agriculture.

Mr. Shaikh, who was booed by the opposition, which at moments almost drowned out the delivery of his budget speech, said the government had identified 2.3 million wealthy citizens who currently pay no tax and whom it will pursue. He gave no further details.
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To fund its gaping budget deficit, the state has in the past year increasingly relied on borrowing from the central bank, essentially printing money and stoking inflation to 13%. Mr. Shaikh said the government had recently cut back on borrowing from the central bank and would aim to get inflation back to single digits.
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By borrowing so heavily from its own banking system, the government has choked off the supply of credit to private businesses. Foreign investors—already nervous because of the precarious security situation in Pakistan—have largely shunned the country.

That has stunted economic growth, estimated at 2.5% for the year ending June 30, which is insufficient to create enough jobs for the two million new job seekers coming onto the market each year. The IMF says the country needs 8% annual economic growth to create enough work. India's economy, by comparison, in the year ended March 31 grew 8.5%.

For now, Pakistan is unlikely to plunge back into a balance-of-payments crisis of the kind that forced it to call in the IMF in November 2008. That's because exports are doing well, fueled by high global agriculture prices for crops like cotton. The country is running a small current-account surplus, compared to its usual deficit. The currency, the Pakistani rupee, has been stable for the past few months and Pakistan's foreign-exchange reserves are about $14 billion, or enough to cover four months of imports.

Still, oil-price rises this year is likely to increase Pakistan's import costs in the months ahead, which could send the current-account back into deficit. The poor state of government finances, if unchecked, could further undermine foreign confidence in months ahead, donors and analysts say.


http://online.wsj.com/article/SB10001424052702304563104576363432170384892.html
Riaz Haq said…
Here's Frontier Post on Pakistan's "dismal" economic performance in 2010-11:

The latest Economic Survey of Pakistan, as released by Finance Minister Dr Abdul Hafeez Sheikh at a news conference on Thursday, has portrayed a dismal picture of the performance of sectors key to the national economy; failing to meet most of the targets set for 2010-11, including the vital Gross Domestic Product growth that was set to achieve a target of 4.5 per cent and grew only 2.4 per cent in real terms during the outgoing fiscal. As for the budgetary deficit, this may also swell from an estimate of 5.3 per cent to around 6 per cent despite claims of macroeconomic development and “putting the economy back on track”. One significant portrayal is the rising inflationary trend that now stands at 14.1 per cent and food inflation is now touching a whooping 18.4 per cent despite bumper wheat and rice crops. This factor has sent the middle classes and the poor reeling under escalating cost of living making their life miserable. The fact that more inflation is coming from hike in food prices is detrimental to poverty alleviation efforts. The poor GDP growth mainly contributed by services sector (53.3 per cent), agricultural sector (25.8 per cent) and industrial sector (20.9 per cent), is because agriculture gained only by 1.2 per cent and manufacturing sector by 1.71 per cent.There seems a little improvement in collection revenues by 1.71 per cent. The government collected a revenue amounting to Rs1026.5 billion in full fiscal of 2009-10 and this amount has now posted an encouraging Rs1156 billion up to March 2011. Similarly, there is no addition to foreign debt that stands at $55.9 billion as in the previous financial year. But debt servicing has cost higher this fiscal — $6.94 billion as against $5.78 billion in 2009-10. Remittances from abroad also rose to $9.1 billion as against $7.3 billion in the previous fiscal. So is the case of foreign exchange reserves which showed a ceiling of $17.1 billion against $15.04 billion in 2009-10. However, for obvious reason of ongoing terrorist attacks, foreign direct investments have come down $1.49 billion as against $1.6 billion the previous fiscal. But it is not understandable how foreign direct investment was higher than the outgoing fiscal when the dangers of the war on terror and uncertain internal security were no different from the previous financial year. There is no explanation to this situation in the latest Economic Survey of Pakistan. One conspicuous data missing from the document was that of poverty. The finance minister defended the absence of how many more people have slipped down the poverty line (estimated on the basis of an income of less than one US dollar a day) during 2010-11 pleading that the poverty survey was still in progress (understandably for the use of disbursement of cash under the Benazir Income Support Programme) and will be issued as and when completed. In fact such a data to portray the extent of abject and absolute poverty in the country has not been made available and, obviously, no poverty survey has been in hand for six years. However, poverty was recorded at 35.4 per cent in 2000-01 and the Musharraf’s dictatorial regime claimed five years later that it had come down to 22.3 per cent. All factors like constantly rising prices of food and other essential commodities and utility bills owing to frequent raise in power tariff and prices of petroleum products, besides other socio-economic aspects, some more millions must have found themselves reeling under the poverty line.The survey tells a story of economic failures and not meeting most of the targets for the fiscal 2010-11. Even a tight-fisted fiscal discipline, forced by the State Bank of Pakistan, failed to prevent widening deficit and mounting inflation that ultimately shrank capital formation substantially. ....
Riaz Haq said…
Here's a Dawn Op Ed by Pak economist Shahid Burki on budget 2011-12:

AT this difficult time in its history, Pakistan has one of the most competent teams of economic managers in place in years. They are stars from the field of finance, development, planning and investment banking.
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The first, of course, is the country’s dismal resource situation. As has been said repeatedly, the country continues to slip in terms of collecting a reasonable amount of national income as taxes.

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There are several unpleasant consequences of this. The most depressing of these is that the government does not have much left in its hands to pay for social services the poor need and deserve.
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The other side of the resource coin is government’s non-development expenditure. It is widely known that there is an enormous amount of waste in the way it spends its meagre resources.

The finance minister should have addressed this issue more fully and with resolution. He also needed to lay out a credible plan for addressing waste and inefficiency in the way large public sector corporations are being managed.

Managers of most of these poorly performing entities have been appointed on the basis of their links with those in power rather than on the basis of competence. It is not surprising that they are a huge drain on the public exchequer.

The finance minister did well when he had the portfolio of privatisation in one of the administrations of the Pervez Musharraf period. He could have used that experience to lay down a strategy and a plan for handing over some of these enterprises to the private sector.

This brings us to the issue of the fiscal deficit which has been the Achilles heel of the management of the Pakistani economy. The budget, with an eye on the on-going discussions with the IMF, promises to reduce this to four per cent of GDP. Whether this will help to win the support of the Fund will depend on how that institution sees the tax effort in light of the country’s history.

The managers of the economy have once again decided not to touch agriculture as a source of revenue. This means they were not able to overcome the resistance of the big farmers who have managed to get their sector exempt from income tax. The constitution does not allow federal income tax to be levied from agriculture, but Islamabad can exert pressure on the provinces to take care of this sector which accounts for over one-fifth of the national income. During my brief tenure as the de facto finance minister in 1996-97, the access of the provinces to the resources in the Divisible Pool was made conditional upon raising income tax from agriculture.

We prescribed two per cent of agricultural income as the minimum for drawing from the divisible pool. Unfortunately this was not looked at as a condition in the Seventh National Commission award announced at the end of 2009 but it could have been done retroactively in the budget. But that required political will.

The budget speech also promises to reduce the rate of inflation by half, to nine per cent in 2011-12. The assumption here is that a smaller fiscal deficit will reduce the printing of money for financing which in turn, by decreasing the supply of money, will bring down inflation.
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Where will this budget take the economy over the next financial year? The answer unfortunately is not very far. It will not revive economic growth, not reduce the dependence on foreign flows, not reduce the incidence of poverty nor lessen the gap between the rich and the poor, and not help to integrate the economy with rest of the world. Something better was expected from a team of this talent and experience.
Riaz Haq said…
The European Union has signed an agreement to provide 225 million euros for development projects in Pakistan, according to The News:

The agreement was signed by the Finance Minister Dr Abdul Hafeez Shaikh and German Federal Minister for Economic Cooperation and Development Dirk Niebel and European Commissioner for Development Andris Piebalgs at the finance ministry.

The money will be spent from 2011 to 2013 on developing programmes for rural and natural resource, education and human resource, governance and trade development.

Under the arrangement, the EU has committed an annual grant of 75 million euros. Over the three-year period, 90 million euros will be spent on rural development and natural resources management, 70 million euros on education and human resource development, 50 million euros on governance and 15 million euros on trade development.

Briefing newsmen about the meeting, Shaikh appreciated the EU and Germany for their support to economic development in Pakistan.

The minister discussed the current economic situation and measures taken by the government for stabilising and increasing revenue through tax reforms.

The minister said that despite narrow fiscal space, Pakistan has not compromised on social and poverty-related spending and is pursuing a strategy to promote growth.

“As a result of the initiatives to stabilise economy, indicators have shown improvement and the economy is able enough to withstand challenges,” he added.

The minister thanked Germany for supporting Pakistan’s efforts to get access to the EU markets.

The visiting dignitaries appreciated Pakistan’s commitment for sustaining the ongoing economic reforms programme and reaffirmed their support to Pakistan in this regard.

They expressed hope that Pakistan would continue with the reform process.

Niebel said that under the recently concluded bilateral negotiations, Germany had committed additional 78 million euros for education, energy, health and governance besides assuring 12 million euros for the Multi Donor Trust Fund.

Out of the 78 million euros committed by Germany, 48.5 million euros will be spent on energy, 13 million euros on health, 9 million euros on governance, one million euros on education and 6.5 million euros outside these priority areas.
Riaz Haq said…
Here's an Op Ed in The News by NUST Business School Dean Dr. Ashfaq Khan calling Pakistan's 2011-12 budget "non-serious":

....The federal budget for 2011-12, the present government’s fourth, is a non-serious budget because it understates expenditures and overstates revenue and thus injects elements of risks. No sensible finance minister and his team would prepare a budget replete with serious risks.
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There are three major risks associated with non-tax revenue. The first is the expected sale of licenses of third generation (3G) cellular services. Rs75 billion have been added in the non-tax revenue under the sale of licenses. Interestingly, the government had kept Rs50 billion under the same heading in non-tax revenue last year as well. Can the PTA sell these licenses in a transparent bidding process this year? The answer is in the negative, and as such the Rs75 billion may not be collected.

Secondly, the government expects to receive Rs119 billion under the Coalition Support Fund (CSF) in the next budget. In the current year it has received Rs63 billion ($742 million) and is striving hard to get the remaining amount in the next two weeks. Can Pakistan get the remaining amount this year? Can we expect $1.35 billion (Rs119 billion) under the CSF next year from the United States? Certainly, there are serious risks involved in such inflows.

Thirdly, the government has targeted Rs200 billion from the profit of the State Bank of Pakistan in next year’s budget. To deliver Rs200 billion to government, the SBP will have to further hike the discount rate and also allow the government to borrow directly from the SBP to finance the budget deficit. I expect neither of these to take place in the next fiscal year, and as such there is risk attached to the Rs200 billion from the SBP.

Let me now turn to the risks on expenditure side. The Inter-DISCO tariff differential has fluctuated wildly in the current budget. The government had targeted a power-sector subsidy of Rs30 billion in last year’s budget, but the year is expected to end with Rs240 billion. The government has targeted a power subsidy of Rs50 billion in next year’s budget – a reduction of Rs190 billion. How credible is this number? Is the government ready to increase power tariff in the range of 22-25 percent next fiscal year? Has the power tariff hike resolved our power-sector issues? An increase in power tariff alone has not worked, is not working and will not work in the future. By raising the power tariff the government is perpetually financing the inefficiencies, theft, corruption and overstaffing of WAPDA/PEPCO and the power distribution companies. Thus, like last year, there will be massive slippages in power-sector subsidies, given the fact that Budget 2011-12 is an election budget as the finance minister has himself proclaimed.

The government has targeted a budget deficit of Rs851 billion, or four percent of the GDP, consistent with the IMF requirement for the next fiscal year. The federal government deficit is targeted at Rs976 billion, or 4.6 percent of the GDP, and it is assumed that the provincial governments would generate surpluses of Rs125 billion or 0.6 percent of the GDP to arrive at the targeted deficit of 4.0 percent of the GDP. The governments of Sindh, Punjab and Khyber-Pakhtunkhwa have already presented their budgets with combined surpluses of less than Rs1 billion. In other words, the budget presented on June 3, 2011, will not even see the light of the new fiscal year. Pakistan will begin the new fiscal year with a budget deficit target of 4.6 percent of the GDP, instead of four percent. Slippages on both revenue and expenditure sides, as stated above, would certainly take the deficit to over six percent of the GDP; that is, in line with the average deficit of the last four years.


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=52457&Cat=9
Riaz Haq said…
It seems that the latest 2011-12 budget passed by the PPP-led coalition pleases neither the right nor the left. Here's a view from the World Socialist Forum:

The $31 billion budget was passed, without amendment, by the National Assembly in June after months of maneuvering by the PPP. Attempts by rival parties to posture as opponents of IMF austerity, especially on the part of Nawaz Sharif’s Pakistan Muslim League (N), produced a months-long political crisis for the PPP. Although the entire political establishment supports austerity, privatization and other pro-business reforms, the PPP’s rivals have sought to distance themselves from the implementation of policies that they know will incite opposition from the working class and rural poor.

Had the National Assembly rejected the budget, the coalition government would have been forced to resign. Ultimately, the PPP was able to get the budget passed with the support of the Pakistan Muslim League (Q) and the Karachi-based Muttahida Quami Movement (MQM).

The MQM had previously left the coalition in May forcing the PPP to invite the PML (Q)—which served as a civilian veneer for the Musharraf dictatorship— to join the government so as to provide it with the parliamentary votes needed to adopt the budget and share the burden of imposing unpopular measures. The MQM subsequently rejoined the government and helped pass the budget.

The PPP-led government is determined to narrow the budget deficit in order to bring an end to a freeze on IMF credit. The IMF has refused to disburse any money to Pakistan since May 2010, citing the government’s failure to implement draconian pro-market reforms, including a Goods and Services or VAT-type tax. The government is desperate to secure the remaining two tranches of an $11.3 billion loan originally issued in 2008, about $3.2 billion. It has also indicated it will soon be seeking additional IMF funding, at least in part so it can begin paying back the 2008 loan.

During the past year, the state has increasingly relied on borrowing from the central bank to fund its budget deficit, stoking inflation to 13 percent. According to Finance Minister Abdul Hafeez Shaikh, the government hopes to reduce the deficit to 4 percent of gross domestic product during the 2011-2012 fiscal year, down from 5.7 percent of GDP for the financial year that ended June 30. It plans to achieve this by decreasing its expenditure and broadening the country’s tax-to-GDP ratio, which, at around 9 percent, is one of the lowest in the world.

After failing to secure the requisite political support to impose a new goods and services tax, the government created a Reformed General Sales Tax (RGST), ending sales-tax exemptions on about 500 items. This is expected to bring in additional revenues of about 200 million Pakistani rupees, even while the government lowers the sales tax rate by one percentage point from 17 to 16 percent.

The RGST and other indirect taxes whose burden fall most heavily on the working class and toilers are supposed to raise 64 percent or close to two-thirds of the government’s 2 trillion rupees ($23.2 billion) in tax revenues


http://wsws.org/articles/2011/jul2011/paki-j22.shtml
Riaz Haq said…
US State Dept & Sen Feinstein defend US aid to Pakistan, according to Dawn:

WASHINGTON: The US State Department on Tuesday defended aid to Pakistan amid calls from senators for a full review of whether economic and military assistance there serves the US national interest.

“We believe our assistance to Pakistan still continues to provide dividends for the American people in trying to grow and strengthen Pakistan’s democratic institutions, boost its economy,” said spokesman Mark Toner.

“In the long term, you know, those are the kinds of things we’re seeking to achieve,” he told reporters one day after Republican Senators John McCain and Lindsey Graham made a full-throated call for reevaluating the aid.

His comments came shortly after US Senate Intelligence Committee Chair Dianne Feinstein said that cutting assistance to Pakistan would be unhelpful but warned that calls to do so had strong congressional support.

“I don’t think that’s useful,” she told reporters. “My understanding is that there’s some overtures under way to restore the relationship. Well, that’s fine, but I suspect that if a bill were to come to the floor which fenced money, the bill would have a good chance of passing,”she said.

US lawmakers have expressed mounting anger at Pakistan, accusing military and intelligence officials there of supporting the Haqqani network blamed here for attacks on US forces and targets in Afghanistan.

“I can only express my profound disappointment with the relationship” and the “deterioration” in an already troubled alliance that “goes up and down, and up and down, and up and down,” she said.

“My very strong feeling is you can’t walk both sides of the street with respect to terror,” said Feinstein.

Relations slid to a new low last month when Nato air strikes killed 24 Pakistani soldiers on the Afghan border, prompting Pakistan to boycott an international conference in Bonn on Afghanistan’s future.

“This is a very complex relationship,” Toner said, adding that the deadly border incident “was difficult for the Pakistani people, for the Pakistani government.”

“They have reacted in a way that shows how important and how significant this tragedy was for them,” Toner said.

“It’s absolutely essential that Pakistan, Afghanistan and the US, other international partners, work through this and beyond. It’s in all our interests.”

But Republican Senator Mark Kirk told AFP that McCain and Graham, who serve on the Senate Armed Services Committee, “are right.”

“Military aid to Pakistan is unsustainable, and in this time of deficits and debt, we ought to save the money,” he said, warning that if Pakistan has chose “to embrace terror and back the Haqqani network,” it should do so “without subsidies from the US taxpayer.

Kirk has also called for bolstering ties to India and “making India a military ally of the United States and to encourage India to fill the vacuum in Kabul once we leave.”


http://www.dawn.com/2011/12/07/us-state-dept-defends-pakistan-aid.html
Riaz Haq said…
Here's a Daily Times report on Pakistan's Planning Commission's efforts to improve economic governance:

ISLAMABAD: Planning Commission of Pakistan with the support of Department for International Development (DFID) and assisted by Governance Institutes Network International (GINI) has initiated the process of consultative workshops in all provincial headquarters and major business hubs to involve stakeholders for economic literacy and local ownership to facilitate the implementation of framework for economic growth of Pakistan - a strategy that seeks accelerated and sustained growth and development formulated by the Planning Commission.

Planning Commission of Pakistan has developed a framework for Economic Growth of Pakistan, which has been approved by National Economic Council (NEC).

Framework for economic growth is informed by the latest in economic thinking and seeks to strengthen both government and markets. It is not a ‘government versus markets’ approach but a ‘government and markets’ approach. An efficient government underpins a vibrant market. Much of the proposed reforms are to get the role of government and market in balance to develop efficiency within and between the two. At the first stage, efforts will be undertaken to revive the economy to its short-term potential GDP growth rate of about 5-6% a year. If issues regarding energy governance are resolved and some credible macro stability is reached, this could be achieved in a short time.

The strategy also suggests deep and sustained reforms - in areas such as public sector management, developing competitive markets, urban management and connecting people and places - as a way forward for accelerating growth to above 7%. The major themes of the Framework for Economics Growth are vibrant and competitive markets, governance, urban development, youth and community and energy.

Six critical changes have been identified that need to be introduced to strengthen the linkage between the Planning Commission and government performance. These changes are: strengthen the Medium-Term Development Framework (MTDF) and the Medium-Term Expenditure Framework (MTEF) for setting medium-term priorities in line with growth strategy and reforms agenda, support a unified result-based budget preparation process, decentralise responsibility for projects to line ministries, redefine the Planning Commission’s role and processes in respect of major capital projects and establish a results-based monitoring and evaluation system.

Planning Commission should lead the reform and change process through identification and advocacy of critically required amendments in policies. The commission has urged all stakeholders to own the policy and become agent of change, as until and unless they put force behind this growth framework, it may not be implemented in its true spirit.


http://www.dailytimes.com.pk/default.asp?page=2011\12\20\story_20-12-2011_pg7_15
Riaz Haq said…
Here's a Businessweek story on Pakistan's informal economy:

It’s early morning in Karachi, Pakistan’s biggest city, and Muhammad Nasir is outside his makeshift shelter of palm leaves, rags, and bamboo, washing up after breakfast. He uses water stolen from a nearby supply pipe that belongs to the local water utility. The 17-year-old bids farewell to his mother, an unlicensed midwife, and walks to his tire-repair shop, an open-air stand in a residential area with a table of tools and a wooden bench. He checks to make sure the electricity he’s drawing illegally from the overhead power line is on so he can run his tire pump. Then he sends 10-year-old Abid, one of his two employees, along with 12-year-old Irfan, to get tea from a nearby shop.

Nasir’s business, his home, his power and water supply, and even the cup of tea Abid brings him don’t exist in Pakistan’s official figures. They’re part of another economy that doesn’t pay taxes or heed regulations. It probably employs more than three quarters of the nation’s 54 million workers and is worth as much as 50 percent of Pakistan’s 18 trillion rupee ($200 billion) official gross domestic product. And while the documented economy had its smallest expansion in a decade at 2.4 percent in the year ended June 2011, soaring demand for cars, cement for houses, and other goods shows the underground market is thriving.
----------
the nation’s purchasing power is more than estimated, says Nadeem Naqvi, managing director of the Karachi Stock Exchange. Rising crop prices have pumped an extra 1 trillion rupees into the rural economy in the past four years, most of it undocumented, Naqvi says. He estimates agriculture may account for as much as 35 percent of GDP, instead of the 21 percent reported.

Evidence of consumer demand is everywhere as new shopping malls and restaurants in Karachi are filled to capacity. Car sales rose 14 percent in February from a year earlier, as more people could afford a Toyota Corolla or Suzuki Mehran (a small hatchback), according to the Pakistan Automotive Manufacturers Association. More than half a million motorbikes hit the road in the eight months ended February, a 5 percent increase, perhaps a sign that Nasir’s tire business has a bright future. ..
---------
The bottom line: If participants in Pakistan’s undocumented economy paid their taxes, the government would collect an extra 800 billion rupees.


http://www.businessweek.com/articles/2012-04-05/the-secret-strength-of-pakistans-economy#p2
Riaz Haq said…
Here's a Dawn story on Pak tax collector urging wealthy to pay taxes:

LAHORE: Chairman Federal Board of Revenue (FBR) Ali Arshad Hakeem on Saturday issued a warning to tax evaders and said the FBR had located over three million citizens who had enormous wealth but had not been paying their taxes, DawnNews reported.

Speaking at a ceremony in Custom House, Lahore, Hakeem said out of a population of 180 million, only 800,000 people were paying their taxes.

He said tax evaders were being given 75 days’ time to fulfill their responsibilities as citizens after which their names would be added to the exit control list (ECL) and their national identity cards would also be blocked.

The FBR chief said Pakistan’s system of taxation was in dire need of reformation, adding that the country could not be run with the existing taxation system in place.

Hakeem added that Pakistan had one of the lowest tax-to-GDP ratios in the world.

He stressed that the country was in dire need of tax reforms and that the government should take immediate steps in this regard.

The FBR chief’s remarks come in the wake of the introduction of a controversial tax amnesty bill in the National Assembly.

The opposition says the bill is meant to provide opportunity to millions to whiten their black money whereas Finance Minister Dr Abdul Hafeez Sheikh has said that there were only 800,000 taxpayers in the country and the bill would bring a substantial number of people into the country’s tax net.


http://dawn.com/2013/01/26/fbr-chief-says-countrys-tax-system-needs-reforms/
Riaz Haq said…
Here's a Telegraph story of Pak tx collector fired by judges for "simply too successful in forcing people to pay more taxes":

In a country where almost no-one pays income tax, including more than two thirds of MPs, it only took seven months for Ali Arshad Hakeem to become a hated man.

As Pakistan's newly minted chief taxman, he built a database designed to monitor the spending habits of millions of people, and work out how much tax they owed.

At the click of a mouse, he could call up details of the elite's holiday habits, electricity bills and bank accounts, complete with photos addresses and vehicle details.

This quiet, technocratic revolution came to a juddering halt last month, when Mr Hakeem was suspended by judges over allegations that his appointment breached government rules that demand each job be filled from a shortlist of three.

In Pakistan's murky world of political appointments and patronage systems, few believe that was the real reason. Instead, his supporters say he was simply too successful in forcing people to pay more taxes. In other words, he was too good at doing his job.

A recent report by Pakistan's Centre for Investigative Reporting revealed that President Asif Ali Zardari and Rehman Malik, interior minister until mid-March when the government stepped down ahead of next week's elections, were among those politicians who paid nothing.

It made gloomy reading for anyone wondering whether there was any will inside Pakistan to reform. "The problem starts at the top," the report stated. "Those who make revenue policies, run the government and collect taxes, have not been able to set good examples for others."

Two of Mr Hakeem's key appointments have since transferred, moving them away from jobs where he said they would have helped bring more than £1.3 billion into government coffers.

"It's gone. And I'm not going to do it again," Mr Hakeem, 49, told The Sunday Telegraph - his relaxed demeanour and easy smile belying the bitterness he feels.

Much of his work has been undone in the short time since he was forced out, he said, and he had no appetite to take on the courts or challenge his suspension. His wife and children had already suffered enough stress.

"I hate it. I worked 20 hours a day. I've taken so much hatred for this, everyone is my enemy and out to get me - and then they sack me. Angry is not even the word," he said.

The decision to oust him will worry international donors who have kept pressure on Pakistan to shake up its anaemic tax system. They fear that without economic growth and an expanding revenue, the country's growing population could tip what is a fragile state into a failed state.

Pakistan is officially classed as a middle income country. It has the resources to build more than 100 nuclear warheads yet depends on handouts to keep its power stations, schools and hospitals running.


http://www.telegraph.co.uk/news/worldnews/asia/pakistan/10037380/Pakistan-elections-how-the-tax-man-was-forced-out-for-being-too-good-at-his-job.html
Riaz Haq said…
Pakistani tax officials said they arrested two executives employed by a local arm of computer giant Hewlett-Packard Co. HPQ -1.09% on suspicion of corporate tax evasion.

Arrests are a preliminary step in Pakistani legal proceedings. The two were detained following a raid on offices of a large Pakistani computer seller that found records that allegedly indicated equipment wasn't properly taxed.

The officials indicated the tax evasion accusations could be expanded after further investigation. They said many of the allegedly untaxed goods could not have been brought into Pakistan without the knowledge of customs authorities.

Tanveer Malik, director of intelligence and investigation for the country's Federal Board of Revenue, said Shahid Ali Khan, H-P Pakistan's country general manager for printing and personal systems, and country controller Salim Rawjani were arrested in Karachi after the agency received "overwhelming evidence" of wrongdoing.

Efforts to reach Messrs. Khan and Rawjani were unsuccessful.

Mr. Malik said the government agency "found no evidence" of the U.S.-based company's involvement in the alleged wrongdoing.

"We have no comment at this time, other than to say that H-P adheres to the highest ethical standards," a spokeswoman for H-P in California said.

Mr. Malik said the arrests were tied to an investigation that began with a February raid on the warehouse of Advance Business Systems Pvt Ltd., one of Pakistan's largest computer systems distributors. ABS could not be reached for comment.

Records seized during the raid eventually led to charges being filed against ABS management for sales tax evasion, he said. "The evasion was done by under-invoicing the products," Mr Malik said.

He said the probe led to Dell Inc. and H-P's Pakistani units, which were asked to provide records and details of their transactions with ABS.

"Dell replied promptly and gave us full compliance," Mr. Malik said. H-P Pakistan managers declined to share information, he said.

A Dell spokesman said it complies with laws and regulations in all jurisdictions and cooperates with law enforcement when necessary.

http://online.wsj.com/news/articles/SB10001424052702303532704579481690276697498
Riaz Haq said…
Here's a News Op Ed on devolution of fiscal power in Pakistan's constitution:

Fiscal devolution involving the transfer of taxing and spending powers to sub-national levels of government is totally non-existent in Pakistan despite clear command contained in Article 140A of the Constitution of Islamic Republic of Pakistan. Pakistan is in dire need of fiscal devolution — presently major fiscal powers are concentrated in the hands of federal government. Even the Constitution denies the provinces right to levy sales tax on goods within their respective territories.
The provinces have also shown apathy to devolve administrative and fiscal powers to local governments. Since all broad-based and buoyant sources of revenue are with the federal government, contribution of provinces in total tax revenues is only six per cent and in overall national revenue base (tax and non-tax revenue) just around eight per cent. This has made them totally dependent on the Centre for transfers from divisible pool.
What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by the federal government through levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of other services.
Like other federations — notably India, USA, Canada — in Pakistan the provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Despite levying of taxes by the federal government that should have been the provinces’ right, Centre has miserably failed to reduce the burgeoning fiscal deficit that is reaching a horrifying mark of Rs1.8 trillion this year. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted.
------------
The provincial parliaments in Pakistan should be pressurised by civil society to enact laws for establishment of local governments as ordained under Article 140A of the Constitution on the basis of social policy — they have so far just copied the previous outdated ones with patchwork here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.
In a nutshell, for achieving the goal of fiscal devolution, local governments’ financial resources must be commensurate with the responsibilities provided for by the constitution and the law to ensure welfare of the people and ensure sustainable growth at grassroots level. Part of the financial resources of local authorities shall derive from local taxes and spent for providing universal entitlements and development. Pakistan must follow the model of welfare states where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks.


http://tns.thenews.com.pk/fiscal-devolution/
Riaz Haq said…
Mass tax avoidance chokes #Pakistan economy - http://FT.com http://on.ft.com/1eOItqc via @FT


As an industrialist in Pakistan’s southern port city of Karachi recounts his woes, from frequent power cuts to a shortage of trained workers, his accountant barges in with a question.
“Sir, how much should we earn from the farm this year?”


“Let me see how much we need to earn from the farm and get back to you,” the industrialist replies.
The encounter provides a glimpse of one of Pakistan’s toughest economic challenges: reforming its chronically dysfunctional tax-collection system.
Only about 0.5 per cent of Pakistan’s 200m people pay income tax, compared with 2-3 per cent in India and 20 per cent in China, according to the OECD.
Compliance with income tax payments is so poor in parts of the country that the cost of running local tax offices exceeds the tax they collect.
“Frankly, the government could end up saving money in some of our remote areas if the tax offices there were shut down today,” says one government official.
The problem has not been solved by a plummeting poverty rate, which fell from 65 per cent in 1991 to 13 per cent in 2011 according to UN figures released last week.
Huge numbers of affluent Pakistanis dodge their tax by colluding with corrupt tax officials to understate their incomes, exploiting loopholes, or both.
In one of the most notorious ploys, people buy farmland — for which there is a tax amnesty — then overstate their agricultural income and understate earnings from other business interests.
The country’s parliament, dominated by landowners, has blocked attempts by successive governments to remove this loophole.
A December 2013 study by the Centre for Investigative Reporting in Pakistan reported that almost half of the country’s 1,070 lawmakers in provincial and national assemblies paid no tax the previous year. More than 10 per cent did not even possess tax numbers.

The tax problem, analysts say, risks undermining Pakistan’s recent run of good economic news.
Business confidence is on the rise, economic growth has been recovering, hitting 4.1 per cent last year, and official liquid foreign reserves have grown almost fourfold in the past year to $12.5bn. Last month the central bank cut its benchmark interest rate 1 percentage point to 7 per cent and consumer price inflation is about 2 per cent, having been stuck above 8 per cent only a year ago.
But plunging oil import costs have played a large part in the upturn. The International Monetary Fund says decisive action on taxation is needed to back up this good fortune.
“The tax to gross domestic product ratio is still very low at 10-11 per cent,” says Harald Finger, the IMF official leading discussions with Pakistan on the next instalment of a $6.6bn loan programme. “For vibrant emerging markets, this should be in the 15-20 per cent range.”
Ishaq Dar, the finance minister preparing to present his annual budget on Friday, hails the government’s early success in broadening the tax base, boasting a rise of 200,000 taxpayers since mid-2013 to a total of about 900,000.
Officials say people have been targeted for whom there was clear evidence of wealth, for example frequent foreign travel.

Meanwhile, the country’s ruling elite show few signs of backing reform, according to western economists in Islamabad. “The political system is controlled by people who neither consider tax collection a big priority nor want to do anything beyond lip service,” says one.
Back in Karachi, the industrialist does not expect his own tax practices to change in the near future. “Using a farm income to avoid paying your dues is a common practice,” he says. “Pakistan’s ruling class must first change its behaviour before they expect the public to follow.”

http://www.ft.com/intl/cms/s/0/f8e27d2a-034c-11e5-8333-00144feabdc0.html#axzz3cCWSvo5e
Riaz Haq said…
#India's cash economy - Why #Modi wiped out 86% of its cash overnight? #DeMonetisation #corruption

http://www.bbc.com/news/world-asia-india-37974423

India is in the middle of an extraordinary economic experiment.
On 8 November, Prime Minister Narendra Modi gave only four hours' notice that virtually all the cash in the world's seventh-largest economy would be effectively worthless.

The Indian government likes to use the technical term "demonetisation" to describe the move, which makes it sound rather dull. It isn't. This is the economic equivalent of "shock and awe".

Do not believe reports that this is primarily about bribery or terror financing, the real target is tax evasion and the policy is very daring indeed.
You can see the effects outside every bank in the country. I am in Tamil Nadu in the south of India and here, as in every other state in the country, queues of people clutching wads of currency stretch halfway down the street.

Mr Modi's "shock and awe" declaration meant that 1,000 and 500 rupee notes would no longer be valid.
These may be the largest denomination Indian notes but they are not high value by international standards - 1,000 rupees is only £12. But together the two notes represent 86% of the currency in circulation.
Think of that, at a stroke 86% of the cash in India now cannot be used.
What is more, India is overwhelmingly a cash economy, with 90% of all transactions taking place that way.
And that is the target of Mr Modi's dramatic move. Because so much business is done in cash, very few people pay tax on the money they earn.
According to figures published by the government earlier this year, in 2013 only 1% of the population paid any income tax at all.
As a result huge numbers of Indians have stashes of tax-free cash hidden away - known here as "black money".
Even the very poorest Indians have some cash savings - maybe just a few thousand rupees stored away for a daughter's wedding, the kids' school fees or - heaven forbid - an illness in the family.

But lots of Indians have much more than that.
It is not unusual for half the value of a property transaction to be paid in cash, with buyers turning up with suitcases full of 1,000 rupee notes.
The size of this shadow economy is reckoned to be as much as 20% of India's entire GDP.
Mr Modi's demonetisation is designed to drive black money out of the shadows.
At the moment you can exchange up to 4,000 (£48) of the old rupees every day in cash for new 500 (£6) and 2,000 (£24) rupee notes.
There is no limit to the amount that can be deposited in bank accounts until the end of December, but the government has warned that the tax authorities will be investigating any deposits above 250,000 rupees (£2,962).
Breach that limit and you will be asked to prove that you have paid tax. If you cannot, you will be charged the full amount owed, plus a fine of 200% of the tax owed. For many people that could amount to be pretty much the full value of their hidden cash.
This is brave politics. Some of the hardest hit will be the small business people and traders who are Mr Modi's core constituency. They voted for him because they believed he was the best bet to grow the economy and improve their lot. They will not be happy if he destroys their savings.

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