ISLAMABAD: Federal government is reportedly considering doing away with bank secrecy regulations which according to the Federal Board of Revenue (FBR) are pretty much anachronistic and will obstruct Pakistan's efforts to integrate with the world economy in the years to come.
Official documents available with Business Recorder titled "implementation of tax laws and banking sector's secrecy regulations" which are presently on the Finance Minister Hafeez Shaikh's desk are an effort to enhance revenue from banks. The document states that through Finance Act, 2011, changes were introduced in section 165 of the Income Tax Ordinance, 2001, thereby rendering it obligatory on all withholding agents to divulge complete information ie the name, address, CNIC and NTN, in the (quarterly/monthly) withholding statements, in respect of every single taxpayer from whom tax has been deducted/collected at source.
The operative thinking behind this policy change was: (i) broadening of tax base; (ii) documentation of economy; and (iii) plugging of pilferages by monitoring and meaningful audit of withholding taxes. This change in law also covered interest payments whereby the banks now have to provide complete particulars of all the deposit-holders who receive interest income or make cash withdrawals from their accounts. Circular No 9 of 2011 was issued to operationalise this particular change in law.
According to the documents, sections of the banking sector (eg Pakistan Banks' Association) have expressed concerns that in the presence of certain secrecy provisions available in the laws/regulations governing the banking sector, enforcing Circular 9 of 2011, would be tantamount to exposing the banks to litigation from the depositors on account of violation of privacy rights, and demanded that their risks be covered by bringing the legal infrastructure governing banks in complete consonance with the fiscal codes.
The FBR termed it pertinent to mention that currently Pakistan is aspiring to become signatory to the Multilateral Convention on Mutual Administrative Assistance in tax matters, and also to join the global forum on transparency and exchange of information. Moreover, Pakistan has already signed the SAARC Limited Multilateral Agreement on avoidance of double taxation and a host of other bilateral agreements which squarely enjoin upon Pakistan to provide any information to a treaty partner - our domestic legal incapacity in the wake of banking sector's secrecy regime, notwithstanding.
Supporters of removing secrecy regulation argue that the single most important common denominator in all of these frameworks is zero-tolerance to banking secrecy in any form or manifestation. Thus, against the backdrop of G-20-catchphrase "the era of banking secrecy is over," it is plausible to anticipate that our banking sector regulations enshrining "SECRECY:" are pretty much anachronistic and will obstruct Pakistan's efforts to integrate with the world economy in the years to come.
The main pillars of the banks' secrecy argument are: - Section 33A of the Banking Companies Ordinance, 1962- the mainstay of the banking sector under the secrecy shelter - provides "...every bank and financial institution shall, except as otherwise required by law, observe the practices and usage customary among bankers and, in particular, shall not divulge any information relating to the affairs of its customers... The banks have invariably interpreted Section 33A to mean an absolute secrecy thereby stone-walling the entire stock of money lying in the formal banking sector from FBR.
Protection of Economic Reforms Act, 1992 - Next in line is the Protection of Economic Reforms Act, 1992, particularly its Section 5 and 9, which provided immunity to foreign currency accounts from inquiry by FBR, and secrecy to bona fide banking transactions, respectively. Subsequently, immunity from inquiry for tax purposes was restricted only to foreign currency accounts opened and deposits made therein prior to December 16, 1999, through the Protection of Economic Reforms (Amendment) Ordinance, 1999, yet the banking sector always tried to hedge behind the secrecy enshrined in section 9 of the Protection of Economic Reforms Act, 1992.
During 2011 only, through withholding tax audit of the banks in respect of payments of interest income, a non/under-deduction of Rs 14 billion was detected, out of which Rs 11.6 billion have already been recovered till December 31st, 2011. Thus, lifting of banking secrecy (if, at all, it exists), could add an element of transparency to the banking sector's taxation, its compliance to the legal infrastructure of the country, and also yield additional revenues for the national exchequer.
The FBR has requested the Ministry of Finance (Banking Wing) to take the lead and broach the issues with the State Bank of Pakistan (SBP) and other stakeholders and help FBR evolve consensus as regards voluntary enforcement of the tax laws without having to resort to penal proceedings, and finalise the amendments that would be needed to take out anomalies from the two laws ie the tax law, and banking laws/regulations.
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