Law giving immunity to foreign currency remittances faces abolition

ISLAMABAD: The PTI government is considering abolishing Protection of Economic Reforms Act (PERA), 1992, which gives immunity to all residents of Pakistan against any inquiry from the income tax department or any other authority for any amount of remittances (in foreign currency) received through the banking channels from abroad.

A ministerial source told The News on Tuesday that discussions are already going on in this matter and there is likelihood that the PERA 1992 may not survive. The source said the consideration was to link the abolition of this Act with the tax amnesty scheme that the government had already decided to launch in the near future. It is said that the PERA 1992 was enacted to welcome foreign remittances but the immunity offered by the law has been grossly used by the business community of the country to whiten their untaxed money.

However, the PERA 1992 reading shows that if the law is abolished completely, it will also affect the provision that allows citizens to transfer foreign exchange within or out of Pakistan. The PERA 1992 offers the following immunities to foreign currency accounts.

“(1) All citizens of Pakistan resident in Pakistan or outside Pakistan who hold foreign currency accounts in Pakistan, and all other persons who hold such accounts, shall continue to enjoy immunity against any inquiry from the Income Tax Department or any other taxation authority as to the source of financing of the foreign currency accounts: Provided that such immunity shall not be available to citizens of Pakistan residing in Pakistan and to firms, companies and other bodies registered or incorporated in Pakistan in respect of any new foreign currency account opened or deposits created on or after the 16th day of December, 1999 or to any incremental deposits thereafter in an existing foreign currency account.

(2) The balances in the foreign currency accounts and income therefrom shall continue to remain exempted from the levy of wealth tax and income tax and compulsory deduction of Zakat at source: Provided that such exemption shall not be available to citizens of Pakistan residing in Pakistan and to firms, companies and other bodies registered or incorporated in Pakistan in respect of any balance in a new foreign currency account opened or deposits created on or after the 16th day of December, 1999 or to incremental deposits created on or after the 16th day of December, 1999 in an existing foreign currency account and income therefrom.

(3) The banks shall maintain complete secrecy in respect of transactions in the foreign currency accounts [except as otherwise required under the Foreign Exchange Regulation Act, 1947 (VII of 1947) or the Income Tax Ordinance, 2001 (XLIX of 2001)].

(4) The State Bank of Pakistan or other banks shall not impose any restrictions on deposits in and withdrawals from the foreign currency accounts and restrictions if any shall stand withdrawn forthwith: [Provided that no cash shall be deposited in an account of a citizen of Pakistan, resident in Pakistan, unless the account holder is a filer as defined in the Income Tax Ordinance, 2001 (XLIX of 2001): Provided further that the Federal Government may make rules governing deposits in and withdrawals from the foreign currency accounts.]”

Although the abolition of PERA 1992 is expected to create a stir among the business community, former secretary finance Dr Waqar Masood Khan in his article for The News wrote, “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.”

He explained, “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.”

He added, “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 Section 4 of the law deals with “Freedom to bring, hold, sell and take out foreign currency” and reads as: (1) All citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons shall be entitled and free to bring, hold, sell, transfer and take out foreign exchange within or out of Pakistan in any form.(2) Nothing in sub-section (1) shall apply to.–– (a) any foreign exchange borrowed under any general permission given by the State Bank of Pakistan under sub-section (1) of section 4 of the Foreign Exchange Regulations Act, 1947 (VII of 1947); (b) any payment from abroad for goods exported from Pakistan; (c) proceeds of securities issued or sold to non-residents; (d) any payment received from abroad for services rendered in, or from Pakistan; (e) earnings or profits of the overseas offices or branches of Pakistani firms and companies including banks; and (f) any foreign exchange purchased from an authorized dealer[,money changer or exchange company] in Pakistan for any purpose; (g) cross border or inland movement of foreign currencies in cash exceeding US$ 10,000 or equivalent subject to such annual ceiling as may be prescribed by the State Bank of Pakistan”.