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Thy Neighbour’s Money

Pakistan’s tax amnesty for equity investments is an idea worth studying...

While emerging countries' equity markets tanked in recent times, the good health of Pakistan’s Karachi Stock Exchange increasingly gathered attention. As this attention has spread from the blogosphere to mainstream media, it’s become clear that the main reason for the exchange’s 30 per cent plus gains over the last three months is a tax amnesty on money being invested into stocks.

In March, the Pakistan government promulgated an ordinance under which investors who buy stocks from April 1, 2013 to March 31, 2014 will not have to declare the source of the funds provided they hold the stock for more than 120 days. The ordinance also instituted a securities transaction tax of 0.01 per cent, which Pakistan didn’t have earlier. The avowed goal of the scheme is to turn black money into white and to increase the market size rapidly in order to channel this money into productive investments.

While this last part may or may not happen -- it obviously depends on the rest of the business and investment environment in that country -- there’s no doubt that the concept itself is interesting. The idea, instead of forcing black money to stay underground, allows it to enter the system and later looks to tax the returns and further investments made out of it. This was also the idea behind various tax amnesty schemes that India has had in the past. However, those schemes tied up the amnesty with taxes to be paid back. In contrast, this scheme recognises that the final outcome will be better if black money can be directly deployed as investment.

In India, a vast amount of such money is now changing hands in inflated real estate, gold or other such useless channels, or covertly slipping out of the country. And of course this year and next, a chunk of it will finance the upcoming elections. Meanwhile, the high and mighty of our government are touring the world with begging bowl in hand, looking for any kind of hot money that is willing to show up on our shores.