Combating tax evasion and money laundering

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It is a curious paradox that while funds for worthwhile industrial and business growth and public benefits are scarce in Pakistan, there is colossal unaccounted, untaxed, hidden money (foreign currency in circulation is far more than the total money supply by the State Bank of Pakistan of which 61% is borrowed by the government!) circulating in the economy in search of further undercover gains.

The corrupt and corrupting elements ruling and controlling Pakistan are ever ready to give it legal cover permanent immunity is available under the garb of the Protection of Economic Reforms Act, 1992, 1section 111(4) of the Income Tax Ordinance, 2001, and now the Securities and Exchange Commission of Pakistan (SECP) has proposed amnesty till 30th June 2014 for "investors" in the stock markets.What is more tragic is that this social evil inherent in our tax system gets doubly compounded as it necessitates a greater and greater tax burden on those who are law-abiding.

The most crucial problem faced by the Federal Board of Revenue (FBR) in the reform programme is that of devising astute and stringent measures to curb tax evasion and money laundering so that the burden of taxes can be distributed fairly and justly between different persons in the same or similar walks of life.

Honest taxpayers need to be safeguarded as day by day, they are being disillusioned by the fact that tax cheats are paying nothing under State patronage and in connivance with their friends in the tax machinery.The unholy alliance between tax evaders and corrupt tax collectors has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the existing tax system.

As a first step towards promoting tax compliance, tax declarations of the President of Pakistan, Prime Minister and all his ministers, governors, chief ministers and their ministers, judges of high courts and Supreme Court, heads of all political parties, generals and bureaucrats serving in grades 21-22 should be made public.Pakistan is facing multiple challenges on the economic front: reckless borrowing by the government for meeting its day-to-day expenses and lack of resources for developmental policies, meeting trade deficits, fiscal deficit and balance of payment, and what not.

One of the factors responsible for failure in revenue generation is the speed with which black money is generated every day - courtesy FBR's mafia-like operations that include amongst others, missing containers, refund scams, smuggling, under-invoicing, and abuse of the legal tool of issuing Statutory regulatory Orders (SROs) rather than going to the Parliament for amendments in fiscal laws.

In the context of the prevailing grave challenge to combat terrorism, together with money laundering operations funding the criminals, and the problem of ever-growing black money, which according to independent experts is about three times of the documented economy, there is an urgent need to launch an asset-seizure legislature, rather than giving legal cover to tax cheats at stock exchanges and elsewhere.The huge illegal and untaxed money is a lethal weapon in the hands of the mafias that now control the economy as well as the government.

In the forthcoming elections, they will spend billions to ensure that the present policies of appeasement continue - on this point there is a consensus between Zardari and Nawaz as both enjoy gigantic financial empires outside Pakistan.

Those who get enormous kickbacks in arms deals also defend the status quo, where no questions are asked about sources of funds lying in and outside Pakistan.A study by the State Bank of Pakistan titled '2The Size of the Informal Economy in Pakistan' estimates that the total size of the informal economy is around 30% of the total economy.

That means that some 600 billion rupees are generated every year in Pakistan by the parallel (untaxed) economy (informal but not illegal).The black money generated through organised criminal activities, eg rent-seeking, smuggling in goods and narcotics trade is about Rs 400 billion that is not appearing in the study of the SBP but is documented in 3Pakistan: Enigma of Taxation published in 2011 by the prestigious German company Lambert Academic Publishing.

This amounts to a whooping Rs 1000 billion.

Another independent study [4Pakistan: Drug-trap to Debt-trap] puts the total figure of the informal economy at US $95 billion.When the presence of such monstrous black money is so apparent, why is its criminal accumulation and generation not revealed and the offenders punished, is a question which has been baffling the minds of honest citizens.

They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties? Since 1977, money launderers in Pakistan have been receiving full support from the State.

For example, if anybody brings money (earned from the drug trade or any illegal activity or untaxed money from undisclosed source, hiring services of a local money exchanger to depict it as remittance) through normal banking channels, the tax authorities cannot pose any question about the "source" [reference section 111(4) of the Income Tax Ordinance 2001].

Now there is a proposal from the Chairman SECP to invest such funds in the stock markets and multiply them through capital gains!During the last 30 years, the National Accountability Bureau (NAB), Federal Investigation Agency (FIA), and Anti Narcotics Force (ANF) and FBR have not been able to establish a joint task force to book and prosecute the mighty men in business, politics, judiciary and governments having dirty money as their main power tool.

The NAB, in fact, accepted 'plea bargains' offered by the corrupt, and minted the lot of money as 'share' in recovery.

This is how we run the State agencies at the taxpayers' money, which are established for punishing the tax cheats, criminals, rent-seekers, drug traffickers and terrorists.

In the presence of these and many other law enforcement agencies, the terrorist networks get on a daily basis millions through hundis and hawalas, in addition to extortion money and proceeds of drug-arms deals.

Many of these are even getting funds through normal banking channels in benami accounts.

The non-reporting of such funds by banks to the Financial Monitoring Unit (FMU) established under section 6 of the Anti-Money Laundering Act, 2010 is a serious cause of concern.The recurrent appearance of amnesty schemes and money whitening instruments/modes show that the State has conceded the failure of its tax machinery in performing its main function of collection of taxes.

This nation has become addicted to easy money and such schemes/instruments have become a routine matter for them.

The people hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less an amount than what they would have been required to pay under the normal income tax/wealth tax regime.

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 are paying their taxes honestly at much higher rates than those offered to tax evaders.Even though Pakistan, under tremendous pressure from outside world, has passed the Anti-Money Laundering Act, 2010, section 111(4) of the Income Tax Ordinance, 2001 gives a free hand to money launderers assuring them that no questions would be asked if they remit their ill gotten-funds from outside through banking channels and surrender foreign currency to the State Bank, and get Pakistani rupees as encashment.

The FBR has reassured the money launderers, in Letter No F.4 (34)/ITP/2002 dated 29-02-2002, that "the Department would adhere to its policy of not probing the foreign remittance" brought into Pakistan by any "person".The investment can be made in any legal business from untaxed funds challenged - rather laundered - using the cover provided under section 111(4) of the Income Tax Ordinance, 2011.

One has just to pay a small premium to a money exchanger to fax a remittance.

Indeed it's a wonder how we can sponsor such schemes when the country is faced with a perpetual crisis of borrowing more and more funds to meet the ever-increasing fiscal deficit.

Amongst the many causes for this malady is the ever-growing size of the underground economy and its non-taxation.

The provisions of the Protection of Economic Reforms Act, 1992, specially enacted by Nawaz Sharif for whitening his enormous undeclared wealth, are playing havoc with the economy.

People keep undeclared and untaxed funds in foreign currency accounts (or in bank lockets) or even at home, but neither the FBR officials nor the FIA have any jurisdiction to hold any enquiry in respect of the foreign currency accounts nor could the same be made the basis of a criminal prosecution5.No serious effort has been made by successive governments, both military and civil alike, to determine the loss of revenue due to the existence of the underground economy, not to talk of devising concrete counter measures to bring enormous untaxed money into the mainstream economy.

Rampant corruption and unprecedented tolerance towards black money has made Pakistan a state where the very survival of public institutions is at stake at the hands of ruthless forces representing money power.It is not possible to determine the precise amount of revenue loss and size of the black money or informal economy in Pakistan.

According to some estimates, the parallel economy is growing at an alarming rate of 30-35% per annum.

Every third rupee transacted in Pakistan is black.According to estimates, the volume of black money generated in the year 2010-11 was not less than 22% of Gross National Product (GDP).

If kickbacks in arms deals (kept in banks outside), "rewards" in foreign trade (case of missing containers and importing liquor in the name of supplies to forces in Afghanistan), smuggling (eg huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic are taken into account, the ratio may jump to 30% of GDP.Every now and then, the state announces a tax amnesty scheme that favours tax evaders, smugglers, corrupt, extortionists, drug barons and criminals - the latest one is proposed for stock market investors! Such schemes are an insult to the honest taxpayers [making them appear a foolish lot for honestly paying taxes].

An extortionist in Karachi or Lahore can decriminalise his ill gotten money through such a scheme but the poor businessman who paid that extortionist due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return! The situation needs to be corrected urgently.One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society.

They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth.

This shatters the faith of the common man in the dignity of honest labour and virtuous living.

It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country's economy, which, if not checked in time, is certain to culminate in its death.There is a need for a wider plan to document the entire economy once and for all.

The present government must remember that half-hearted measures, typical of tax bureaucracy, will not yield the desired results.

Firmness, consistency and steadfastness must be shown to counter money launderers, terrorists and tax evaders.

Our survival now lies in liberating the society from the clutches of the corrupt.Pakistan needs to establish a permanent Special Task Force in all the institutions, specifically the ANF, NAB, FIA, FBR, SECP and SBP so that the money laundering operations can be effectively tackled.

Special courts should be established and judges with expertise in financial and banking matters should be appointed, to hear money-laundering cases.

The judges of such courts must be specially trained in the fields of accountancy, and money laundering.

There is an urgent need for introducing policy and structural changes in the banks.

It is unfortunate that 'benami accounts' are widely accepted in the public and private sector banks.Presently, there are over 30 million accounts with the Pakistani banks, out of which more than 25 million are in personal names, not showing what the sources of deposits are.

Out of these, less than 500,000 are liable to pay taxes.

The State can never tap the real revenue potential unless stringent measures are taken to combat tax evasion and money laundering.

Elimination of the parallel economy and proper documentation alone can ensure broadening of the tax base, besides purging the society of black money that cripples and corrupts all walks of life as well as the State structures.(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Tax and Pakistan) are Adjunct Professors at Lahore University of Management Sciences)

1.In the Income Tax Ordinance 2001, promulgated on the dictates of IMF on 13th September 2001, a special provision [section 111(4)] was inserted giving a free hand to money launderers that they would not be questioned if they remit their ill-gotten money from outside through normal banking channels, surrendering the foreign currency to the State Bank and getting Pakistani rupees as encashment.

This provision inserted to bring huge foreign funds to Pakistani economy succeeded immensely as foreign remittances to Pakistan crossed the US $12 billion mark in 2010-2011.

This facility has been cleverly used by criminals, tax cheats and drug syndicates to launder their money with State patronage.

The black money generated inside Pakistan is laundered through "fake" remittances




5.See judgement of the Lahore High Court in Hudabiya Engineering (Pvt) Ltd v.

Pakistan and 6 others 1998 PTD 34.

Courtesy: Business Recorder

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