Mechanism to Discourage Corruption

By Sajjad Shaukat

Although rampant corruption in Pakistan has continued by damaging the social and institutional fabric of the country, yet it has again come into limelight, after the massive leak of secret documents from Panama-based law firm Mossack Fonseca, which were released on April 3, this year.

The level of tax avoidance and money laundering, disclosed in the Panama Papers Leaks run into the several hundreds of billions of dollars, points out the details and names of hundreds of powerful and leading persons across the world. Some countries have announced investigation, while in some countries, the opposition parties and the people are conducting protests, after the revelations of corruption, money laundering, and financial secrecy in relation to their nations.

Iceland’s Prime Minister Sigmundar Davio Gunnlaugsson and Ukrainian Prime Minister Arseniy Yatsenyuk resigned in wake of protests and political pressure inside their countries regarding the revelations of the Panama Papers. British Prime Minister David Cameron is facing increasing calls to resign in wake of public protests after he admitted that he profited from his father’s offshore trust.

Panama documents also include the names of over 200 Pakistanis,  including the current Prime Minister Nawaz Sharif with allegations of tax evasion, fraud, and money laundering—Sharif’s political career since the beginning. In this regard, The Independent in 1998 wrote, “The investigation into Mr. Sharif and his family was originally commissioned in 1993 by an interim government, after Mr. Sharif’s dismissal as prime minister, which asked the agency to investigate 13 separate allegations of corruption and money laundering through overseas bank accounts.”

While the Panama Leaks disclosed, “Prime Minister Nawaz Sharif’s close family has made millions of dollars of investments in a number of offshore companies.”  In this regard, Prime Minister Sharif also addressed the nation and promised appropriate review, while denying that any of his family members were involved in any kind of corruption.

The opposition parties especially Pakistan Tehreek-e-Isnaaf (PTI) and Pakistan Peoples Parties (PPP) have been contacting one another, demanding an impartial investigation about the Panama Leaks in relation to the prime minister, while some are demanding that Nawaz Sharif should quit the government. Meanwhile the PTI has decided to launch protests against the federal government, if it fails to form an independent commission to prosecute the accusations, made in Panama Papers.

However the Panama files highlight Pakistan’s national problem of corruption—especially linked to tax evasion and money laundering.

In fact, illicit capital movement is largely due to lax enforcement of capital and trade controls by regulatory bodies, which results into corruption. Hence, Pakistan needs an effective mechanism to control various forms of corruption which have infected almost every sector of the country.

In this respect, the country requires to enforce an effective implementation of trade and exchange controls regulation with complete overhauling of customs administration and simplification of tariff structure etc. It may be stressed that to control Hundi/Hawals (correspondent) businesses, their related individuals or entities be traced by banking authorities who are holding large sums of funds to settle laundered money in Pakistan.

For the purpose, necessary arrangements may be made with other countries through bilateral agreements about prompt sharing of information, concerning private citizens’ bank accounts and trade-related transactions to and from Pakistan.

In this regard, UAE-Nigeria bilateral agreements, signed on January 19, 2016 provide a model to eradicate corruption in Pakistan. Determined to recover Nigeria’s stolen funds stashed in foreign banks, President Muhammadu Buhari led Federal government, and signed different bilateral agreements with the United Arab Emirates, (UAE). The agreements were essentially on trade, finance and judicial matters.

In this context, The Minister of Justice, Abubakar Malami and his counterpart in the UAE, Sultan Bin Saeed Albadi signed the Judicial Agreements on Extradition, Transfer of Sentenced Persons, Mutual Legal Assistance on Criminal Matters, and Mutual Legal Assistance on Criminal and Commercial Matters, which include the recovery and repatriation of stolen wealth.

Speaking at a reception after the signing of the agreements, President Buhari reiterated his commitment to fighting corruption and restoring Nigeria’s dignity in the comity of nations.

It is mentionable that the incumbent Federal Finance Minister Mohammad Ishaq Dar had once staggered the National Assembly in 2014 that at least $200 billion of ‘Pakistani money’ was stashed away in Swiss banks. He had also announced that Pakistan was considering ways to utilize new Swiss law ‘The Restitution of illicit Assets Act, 2010’ (RIAA) to obtain information about illegally deposited money in Swiss banks and take steps to get it back. Ironically, no further development has been reported, this also needs to be pursued vigorously.

According to the Federal Board of Revenue (FBR), less than 0.5 per cent of Pakistanis pay income tax. That’s just 750,000 individuals out of a population of some 180 million. Tax revenue in Pakistan, as a proportion of GDP is around nine per cent—compared with 14 per cent for countries with similar per capita incomes. Until Pakistan can raise enough money through tax, it will continue to be excessively dependent on loans and foreign aid. Debt to repay loans now stands at $60 billion. This means that over 60 per cent of Pakistan’s federal revenue is spent simply on paying back interest and debt every year, instead of being spent on vital services, such as education, health and infrastructure.

However, the government needs to do is to keep the rates of taxes low, number of taxes reduced, and the tax net broad-based. As regards, income tax, a far better strategy is to have a flat tax system. And, of course, there should be no exemptions and tax holidays since this is what is used in the interest of the privileged and powerful groups of the society at the cost of other sections of society.

Present system of taxation is not good for the ordinary persons as well as for Pakistan’s international friends who want to trade and not give further aid. As a matter of fact, the problem starts at the top. Owing to avoidance of paying their fair share of taxes by wealthy individuals and elected politicians in Pakistan, the burden is shared by the ordinary citizens. These wealthy people or politicians should pave the way by paying actual amount of taxes, helping to close tax loopholes and encourage others to pay what they owe. Sadly, for now anyway, not all these people are the role models they should be.

Now, enough tax has been raised, but not to fully finance improvements in the quality of life for poor people. Definitely, it cannot be good for Pakistan that the elite can afford luxury cars and foreign trips, but cannot afford to pay their real taxes, while concealing their actual assets.

While, the government is also looking to remove exemptions, simplify the tax collection system and drive out corruption. On the other side, if more persons are paying their taxes, it is essential that they want that their money is being spent effectively on public services such as education, health, governance etc. Therefore, the rulers must secure value for their money, while many people in Pakistan live below the poverty line.

As part of the mechanism to discourage corruption in Pakistan, the government must also ensure transparency in collection of taxes. In this connection, the more open and transparent process will provide less opportunity for malfeasance and abuse.

Email: sajjad_logic@yahoo.com