Money Matters

Protecting black money

Money Matters
By Shahnawaz Akhter
Mon, 12, 16


National Assembly makes November 30, 2016 a historic day by approving a bill, which granted the biggest ever tax amnesty in the 70 years of the country. This amnesty is ingloriously significant for it may decriminalize an estimated Rs7 trillion of black or undocumented money parked in property business, whereas the country’s GDP size is around Rs32 trillion. Besides, the most important part of this bill is the tax evaders have been given permanent amnesty to whiten their ill-gotten money for an unlimited time.

It goes without saying the bill has been passed to bestow yet another incentive to the already rich and mighty but the big question is: who were the ‘movers and shakers’ behind getting this legislation passed? Surprisingly, no direct stakeholders i.e. buyers or sellers were party to this matter but the third party – brokers, commission agents – put their weight behind the scheme. The legislators would be in better position to answer this question.

The way the bill was railroaded through the parliament that too without an exhaustive debate has left everyone questioning what are they up to? There may be some advocacy for the scheme, but the majority of the tax experts have blasted the move. They are of the opinion the real estate sector amnesty would permanently destroy the national tax system for many years to come on top of blighting Pakistan’s name in the international community, which is not only cracking down on black money but also taking initiatives to curb its legitimization in any form or through any type of concessional amnesty schemes.

Experts also criticized the amnesty for being sector specific. They said that it was against the Article 25 of the Constitution of 1973. The article reads as: “All citizens are equal before law and are entitled to equal protection of law.”

To some extent, the scheme will benefit those, who raked in hordes of dirty money taking advantage of systematic flaws and were compelled to declare property investment at much lower DC rates. However, what about those who have accumulated money through criminal means such as extortion, kidnapping for ransom, terrorism, target killing, corruption, smuggling etc? It is reported on several occasions that property business was an ideal place for parking such ill-gotten money.

This amnesty is also being termed as a two-edged incentive scheme because it will also help the owners of “Benami” property. The introduction of this scheme is meaningful ahead of introducing “Benami” Laws. There are some highly influential people, who have invested black money in the realty business under others’ names. Now, these powerful individuals will easily transfer those unnamed properties into their names without declaring the source of investment after paying a meager amount of tax.

Despite the immense incentive the latest scheme offers, tax experts are pessimistic about its success saying this scheme is not for the masses but for few hundred rich individuals or families. Therefore, they believe, only a few income tax returns will be filed and a small amount of tax will be collected under the head of amnesty of three percent.

The past experience of the government in introducing amnesty schemes has not been so encouraging. The history of tax amnesty, given time to time, and their outcome can be summed up as: 71,289 declarations received in 1958, 19,600 declarations in 1969, no data of revenue collection or declarations available for 1976, same goes for 1997 but an amount of Rs141 million was collected as revenue, about 88,000 declarations filed in year 2000 amnesty scheme, and Rs2.8 billion was collected at two percent in the scheme announced in 2008. Other amnesties announced after this were: Amnesty for fund invested in sock exchange in April 2012, amnesty scheme for non-duty-paid cars in 2013, amnesty for traders (investment in green field industries etc.) in 2013, and Voluntary Tax Amnesty Scheme (VTCS) where tax authorities had claimed to have received over one million tax returns but only 10,000 returns were filed in reality.

The interesting part of the latest amnesty scheme is the immunity from Section 111 (4) of the Income Tax Ordinance, 2001, which deals with unexplained or undisclosed income or assets. Under this section the tax authorities cannot question about the source of the inflows of foreign remittances. This incentive has been available since 2004. There is no time limit in case of foreign remittances.

Similar relaxation has been given in the latest amnesty on property business by inserting clause (c) to Section 111(4), which in other words can be interpreted as amnesty with no time-limit. However, this amnesty is restricted to the amount which is the difference between immovable properties values notified by the Federal Board of Revenue (FBR) and values fixed by the provincial governments. The main beneficiaries will be the large landholders and the feudal lords of rural areas or small cities, where collector values and fair market values or FBR values are almost equal, so by paying a nominal amount, the invested money in the immovable land will be whitened. Interestingly, majority of parliamentarians belong to these areas and reportedly have huge undocumented assets.

Another aspect of the latest scheme is credibility of the FBR. Most of the officials have commented that it was ‘unfortunate’ to clear the tax evaders without bringing them to task. The FBR, during the past few years, has managed to gather a huge number of property transactions while developing a databank of owners of undeclared or “Benami” assets.

The parliament has granted this amnesty despite a myriad of serious reservations raised by the FBR and other stakeholders. The parliamentarians should come clean on as to why they have taken such a counterproductive measure when the size of underground economy is almost equal to the formal economy.

The FBR in a research study pointed out the amnesty schemes as: “The corrupt, occupying top positions in state institutions, are giving blanket protection to offenders and plunders of national wealth.”

In civilized societies such anti-state elements are treated with iron hand, their ill-gotten money and assets are seized through proper legislation, and exemplary punishment is awarded to them but in Pakistan it’s the opposite.

The FBR’s study on the recurrence of amnesty schemes observed the state had conceded the failure of its tax machinery in performing its main function of collection of tax from wherever it is due. “This nation has become addicted to easy money and such schemes have become a routine matter for them,” the study noted in disappointment.

The following quote clearly shows the height of dismay the FBR is struck by. “It is a tragic situation where the entire state apparatus is subservient to those, who blatantly manage to hide their income and wealth. It is an ugly joke with those, who have been paying their tax honestly at much higher rates than those offered to tax evaders under the scheme(s).”

Given the overall situation of the economy and studies on the black economy and amnesties, it is concluded the revenue losses aggravate income distribution and the wealthy class becomes more and more powerful turning the entire society into a mere instrument to their interests and control. The revenue losses reduce the efficacy of allocations of social resources thus seriously retard the equitable distribution of societal benefits to different cross-sections of society.

At the end, the parliamentarians who are the elected representatives of the nation, should honor the mandate and revisit the scheme or enhance the rate to the extent that people should not think again of making money through criminal means.

The writer is a staff member