Short cuts and political expediency have effectively eroded many possibilities of documentation of economy, being the only mean to improve tax-to GDP ratio. One such glaring incidence is a sub-section of the Income Tax Ordinance, 2001, which consist only of one sentence that effectively overrides whatever else is there in the whole Ordinance. This is section 111(4) which states that any remittance from abroad will be exempt from any enquiry by tax officer.
The amount remitted is any way is not a Pakistan source income, not taxable in Pakistan, therefore, in common sense why there should be any enquiry in relation to tax ability of such sum in Pakistan. Nevertheless, when this subject is read in conjunction with the prevalent foreign exchange regulations, then it transpires, that this sub-section is effectively the easiest and most convenient method to evade tax and acquire assets, in Pakistan and abroad from all kinds of tainted money generated in Pakistan.
Under the prevalent foreign exchange regulations, individuals are allowed to maintain foreign currency accounts. Companies are not so allowed. In India the case operates in a reverse direction. That approach is better and closer to documentation approach. As a second lag, individuals are allowed to feed such accounts by acquiring foreign exchange from the market, being exchange companies. The amount so kept in such accounts can be sent abroad in any manner decided by that individual. The money so sent, if remitted back is not subject to any enquiry as stated above. This circle can be easily and conveniently completed all with 'kosher' manners. It is a legally protected manner in all sense. But does this serves our national economic objectives? The answer is emphatically negative.
Is this simple system, not an easy and well protected procedure to evade tax? If so then how do we say that we are serious in our efforts for documentation of economy and increase in tax base. The natural question is that if the issue so serious and so simple then why corrective measures are not adopted. There are many answers to this paradox. All such aspects are correct and relevant. Now this nation has to decide the course it wants to adopt.
The first answer is that it is an easy and convenient way for importers/traders of imported goods to fund underinvoicing of imported goods. In this manner whole chain of imported good sectors remains outside the tax system. As a nation, for political expediency, we do not want to annoy that group. It has 'shutter power'. The second answer is the notion that undocumented foreign exchange to be a stabilisers balance the parity rate of rupee. Empirical evidences reveal that it is myth based on incorrect facts.
The third aspect, which appears to be a reasonable basis of retention of such an open position, is the negative pressure of inward remittances, which at present, finance around 45 percent of imports of around US $38 billion may arise if tax officers are allowed the powers for any such enquiry. We agree with basis specially on account of manner is which such powers are abused.
This abuse of system does not emanate on account of the provision contained in the income tax law. The cause lies in manner and possibility of feeding such foreign currency accounts and no access of regulator for identifying sources of funds in such accounts The aforesaid analysis reveals that this is an issue relating to foreign exchange regulations being abused as a tax evasion tool. The problem lie in right to maintain foreign currency accounts by individuals, right to feed such accounts by acquiring cash foreign currency against Pakistan rupee without any reporting, the right to remit the funds from such accounts without any information to any regulator and lastly access of such bank accounts to tax regulators.
Are we afraid? Or ill informed about the manner and effects of corrective efforts? Or are not ready to disturb the status quo in the business set up due to political exigency. I think all these aspects operate concurrently. Absurdity of the prolonged silence on this matter becomes more obvious, when we talk at the highest levels, the enquiry against bank accounts kept by Pakistani abroad say in Switzerland. Those actions if fruitful, will be blessing for the nation however the reasons for not inquiring the transactions and balances in foreign currency accounts in Pakistan is nothing but a political exigency.
It is important to note that funds remitted not allowed to be kept in foreign currency account. It is rightly required to be converted into rupees. So linking the matter with inward remittances is only a smoke screen. Liberalisation of foreign currency accounts was made by the party in 1992 which is presently in power. It was a correct and courageous step. They clearly understand that such liberalisation was undertaken to improve inward flow of foreign exchange not allowing disguised conversion of tax evaded funds for a deemed outward flow to be remitted back through an account having blanket immunity under section 111(4).
If effective results have to be achieved then this deceitful circle, duly harboured by foreign exchange regulations and banking system would have to be broken. The first answer is effective regulation on maintenance of local foreign currency accounts and monitoring the same for tax purposes. Central banks, banking system and tax authorities would have to be on same page if any correction is required. An analysis of almost all the countries, even tax heaven jurisdictions reveal that this blanket immunity, non-monitoring and non-reporting is not vogue is any jurisdiction. Are we calling it free for all? If so then this tendency will disseminate in all aspects of our national life.
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