KARACHI: The federal government has restricted foreign currency account holders from depositing locally-purchased foreign exchange into their accounts. Previously, there was no such bar on the foreign currency accounts and the foreign currency account holders were allowed to freely purchase foreign exchange from exchange companies domestically and deposit into their foreign currency accounts maintained with the banks for their genuine requirements like payments of foreign medical and educational expenses.
As per SBP foreign exchange manual updated in March this year, a foreign currency account of a citizen of Pakistan resident in Pakistan can feed with cash foreign currency only if the account holder is a filer as defined in Income Tax Ordinance, 2001. However, Corporate Bodies/Legal entities were not permitted to generate funds from the kerb market for deposit in their foreign currency accounts.
Sources said that after a lapse of almost 28 years the federal government has decided to make and notify the rules under the Protection of Economic Reforms act 1992 (XIII of 1992).
On October 6, the Ministry of Finance (MoF) notified the Foreign Currency Rules 2020, in exercise of the powers conferred by section 11 and second proviso to sub-section (4) of section 5 of the Protection of economic reforms act 1992 (XIII of 1992).
These rules barred the foreign currency account holders from depositing foreign currency purchased locally in their accounts. As per section 4 of the Foreign Currency Rules 2020, "a foreign currency account shall not be credited with any foreign exchange purchased from an authorized dealer, exchange company or money changer, expected allowed by the State Bank through general or special permission under any law. However, foreign currency brought in from abroad and duly declared at the point of entry into Pakistan with Pakistan customs may be credited in the account".
Sources said that the section 4 of the rules has essentially rendered the foreign currency accounts useless as these can only be fed from outside Pakistan and would result in depleting balances, besides forcing citizens to look for alternate sources to meet their genuine needs of foreign currency outside the country. This is also likely to promote the Hundi/Hawala and other malpractices besides serious inconvenience to active tax filers to meet their genuine needs.
This restriction on foreign currency accounts will not only encourage malpractices but also encourage undocumented deposits of foreign exchange currency at homes and in bank lockers, they added.
In addition, this move may also put a negative impact on the country's foreign exchange reserves as foreign currency deposits with banks are also a part of the country's total liquid foreign exchange reserves. "This restriction may create panic among the foreign currency account holders and they would be reluctant to deposit foreign exchange in their foreign currency accounts and may prefer to save their foreign currency savings at home or in lockers," sources said.
They said that this is also the major departure from the provision made through the finance act 2018 that restricted feeding of foreign currency accounts through local purchase to income tax active filers. This restriction was placed to encourage more people to file tax returns for the documentation of the economy.
Similarly, according to section 3 of Foreign Currency Rules 2020, foreign currency account of an individual may be credited with the remittances received from abroad though bank channel except the payment for goods exported from Pakistan, payment for services rendered in or from Pakistan, proceeds of securities issued or sold to non-residents and any foreign exchange borrowed from abroad under any general or special permission of the state bank. Providing, SBP may issue any general or special permission for credit to the account.
As per rules, a foreign currency account may be credited through transfer from another individual foreign currency account. In addition, proceeds' realization on account profit, return and principal amount of investment made in any foreign currency denominated or foreign currency linked scheme of government of Pakistan may be credited into the account.
It may be mentioned here that under the Protection of Economic Reforms act 1992, all citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons are entitled and free to bring, hold, sell, transfer and take out foreign exchange within or out of Pakistan in any form.
When the relevant authorities were contacted, they said active income tax filers have been allowed to continue feeding their foreign currency accounts with any foreign exchange purchased from any local authorized dealer and exchange company.
The previous amendment through which income tax filers were permitted to purchase foreign currency locally for deposit in their accounts, was made through the Finance Act 2018 and rules cannot supersede the Act. Therefore, despite these rules, active taxpayers can build their deposits in foreign currency accounts through purchase of foreign exchange from exchange companies.
Sources said that although the SBP's foreign exchange manual also permits this facility, however, there is need to revise Section 4 of the Foreign Currency Rules 2020. They said that State Bank of Pakistan is likely to issue a clarification with regard to Section 4 of the Foreign Currency Rules 2020 shortly.
Copyright Business Recorder, 2020
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