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Economic notes

April 16, 2019

Moving towards documentation

Opinion

April 16, 2019

The Prohibition of Benami Transactions Act was passed in 2017 but had remained dormant for want of rules for nearly two years. The prime minister had recently ordered early finalization of rules, which were finally promulgated in March after which the law has become fully effective.

The law has far-reaching implications for removal of informal economic arrangements made to evade taxes, conceal assets or maintain fake accounts. It may promote documentation of the economy on a scale not witnessed in previous efforts. It is, therefore, important that this law is fully understood and its implications appreciated by all people in the country.

To examine the law, we begin with some key definitions. Section 2(7) of the Act defines a “benami property” as any property which is the subject matter of benami transaction and also includes the proceeds from such property. The definition of a “benami transaction”, on the other hand, given in Section 2(8), is somewhat complex and requires analytical presentation.

The transactions have been divided into four parts. Part one includes transactions and arrangements whereby a property is transferred, or is held by a person, and the consideration for the property has been provided, or paid by, another person; and the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration. This is a classical manner of engaging in a benami transaction. Person A gives to person B a certain property with the sole purpose of concealing the ownership of A. This may be motivated by tax evasion or preventing creditors to stake a claim. Until recently, this was not an offence. The new law has drawn curtain on such transactions. However, there are exceptions which include cases of properties held in fiduciary capacity, such as by a trustee or directors of companies, or kept in the names of close family members, and the consideration is paid through known sources of income.

Part two relates to property transaction carried out using a fictitious name. This is about fake accounts, where the name of a fictitious person is used. Part three relates to transaction of a property where the real owner is not aware and denies knowledge of the transaction. This is similar to fake accounts; here, though, the person exists but denies any knowledge of keeping an account. Part four is a transaction where the provider of the consideration is someone who is not traceable or is fictitious. This part essentially covers a person who would have gone missing, irrespective of whether s/he knew or not whether an account or property existed in his/her name. The holder, on the other hand, would be unable to prove the sources of consideration paid for the property.

Furthermore, section 2(9) defines a “benamidar” as a person or fictitious person in whose name the benami property is transferred or held, and includes a person who lends his name. This last category where a person lends his name is curious. What it means is that nobody can rent his/her identity for the purpose of holding a property on someone’s behalf solely for the purpose of concealing the identity of the owner. Lastly, section 2(26) defines property in the broadest terms including both moveable and immovable assets, and including monies held in bank accounts.

Given the above setting, Section-3 requires that no person shall enter into a benami transaction or hold a benami property. If any person enters into a benami transaction or holds a benami property, s/he would commit an offence that carries a punishment of rigorous imprisonment for a term which would not be less than one year but may extend up to seven years. Moreover, the benami property would be confiscated in favour of the federal government.

An elaborate mechanism for identification of benami transactions and property has been laid out in the law that would allow due process of defence, appellate tribunals and appeals before the high court, while special courts would be set up for trial of offences under the act.

Evidently, the law provides a comprehensive regime against concealment of assets by keeping them in the name of persons who are not their real owners. We all know that this practice is rampant in the country. The law has now prohibited such transactions or holding such properties. The law has also required, under Section-17, all offices dealing with transactions and registration of properties, including banking and financial institutions, stocks and other exchanges, building authorities, police, tax authorities, civil armed forces etc to assist the authorities and tribunals established under the act in discharge of their functions. Above all, once a benami property or transaction has been identified, and the holder is unable to prove his credentials of ownership, there is no scope of any bargain or remission of any kind. The property would have to be confiscated and the offender would face a minimum jail term of one year, extendable to seven years.

Coupled with the fast-evolving anti-money laundering (AML) and countering financing for terrorism (CFT), this law is closing all avenues of evading taxation, laundering proceeds of crimes and facilitating terrorist financing. It is in our national interest that we bring transparency in our dealings with due protection of privacy.

While the country is moving towards documentation, it would be imperative to also remove a distortion that continues to plague our forex regime – the so-called Protection of Economic Reforms Act (PERA), 1991. This law provides an uncalled for facility to residents to maintain a foreign currency account (FCA) and hold, deposit and remit foreign currency through this channel. This is a standing scheme for flight of capital and occasional source of balance of payments problems. Residents can buy dollars from money changers and deposit them in their FCAs.

The process of dollarization is a sure recipe for creating forex shortages, especially when the country is facing an external account problem, as is happening at present. This budget should see closure of this avenue of instability.

The writer is a former finance secretary. Email: [email protected]

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