Two Asset Declaration Laws were introduced - one each in 2018 and 2019. I supported both. These laws were almost are production of a draft that I had proposed in 2016 in an article in this paper; that was also printed in the book ‘Panama Leak: A Blessing in Disguise. I had been very severely criticized for my views on this subject raising the question of equity. The criticism can only be justified if my arguments in the following paragraphs are rebutted. There may be agreement or disagreement. In this article I will present my viewpoint on this matter. What is written in the following paragraphs is similar to what I wrote in 2016 and said in open court before the then Honourable Chief Justice of Pakistan Justice Saqib Nisar, Justice Umer Ata Bandial and Justice Ijazul Ahsan as an amicus curie in the Panama Leaks case. At the outset, I state that whatever our views may be, all this mess is the result of ‘State Sponsored Corruption’. Let me define the term ‘State Sponsored Corruption’ for tax purposes. This represents tax, corporate or foreign exchange laws that create discrimination between two kinds of taxpayers and allow unrestricted outward flow without any document of the sum that has been provided exemption, immunity or deemed in a particular manner for tax purposes
In another article also carried by this paper I wrote on the subject of ‘Unholy Triangle’ in which I explained how the tax law relating to Presumptive Taxation, legalized abuse of foreign currency accounts and no tax on inward remittances under Section 111(4) of the Income Tax Ordinance 2001 created and continues to allow creation of undocumented assets in Pakistan and abroad. The undesirable result of this mess is that if such assets are required to be documented then an Asset Declaration Law with no tax liability will necessarily be required to be introduced after every four to five years. Call it ‘amnesty’ or whatever one may like. In reality this is an absurdity, a farce, a state’s admission that there cannot be any basis to relate the income with assets created out of such income. This is a form of legalized corruption against the primary principles of accounting, taxation and foreign exchange. As an accountant and a former President of the Institute of Chartered Accountants (ICAP) and South Asian Federation of Accountants I am ashamed to propose the continuation of this system of declaration. In my personal capacity I feel all the more guilty as I also served as Chairman Federal Board of Revenue (FBR). It is on record that the Institute [ICAP] always opposed this absurdity. As Chairman FBR I did whatever little I could in 2019 by converting a lot of presumptive taxation into minimum tax. I admit my failure that it could not be abolished totally especially on income from exports. It should be zero rated, not presumed.
The first purpose of this article is to explain the primary accounting flaw in our tax system under the garb of Presumptive Taxation introduced in the 1990s. In very simple terms presumptive taxation means that an amount which is not ‘income’ is ‘deemed’ to be income and a tax is charged on that amount. This fundamentally means that there is no income-based taxation. For example, from the 1990s to 2019 commercial imports were taxed on presumptive basis. Under that system, a percentage of imported value (say 5%) was considered as full and final discharge of income tax liability under the Income Tax Ordinance, 2001 for any import transaction. For example, if a person imports Rs 100,000 worth of goods then Rs5,000 collected (at source) at the import stage was presumed to be the final tax liability for any income or loss on this transaction of Rs 100,000. Suppose in this case the actual income of that person is Rs 50,000 there will be no tax on such income and Rs 5,000 will be considered as full and final discharge of tax liability. In this case actual income is Rs. 50,000, therefore the importer will have Rs 50,000 to create assets. Suppose the importer buys a house. The house is not declared in the wealth statement. It is identified as undeclared asset. The question is whether the state has any right to levy any tax on that asset so identified. It is absolutely clear that the state has no right to tax any income relating to that transaction of Rs 100,000 so the income from that house has been created has already been taxed. The value of the house cannot be taxed as there is no wealth tax in Pakistan. Maximum charge is a penalty for not disclosing something in the wealth statement if it is due. In case of a company there is no wealth statement. This taxation is a farce, wrong, absurd and inequitable. It is also illegal. However in Pakistan I cannot say so because in the case of Elahi Cotton Mills Limited the Honourable Supreme Court by way of an order written by Justice Ajmal Mian has held that presumptive tax is the final liability for income tax purposes. In my view, this judgment has done more damage to the economy and indirectly democracy then the Maulvi Tamizuddin Khan case. Pakistan is the only country in the world that introduced that tax. In the original presumptive tax regime there was some minor sense. In the original form there was a Section 80C(5) of the Ordinance that provided a calculation of imputed income on that transaction. For example in that case such imputed income may be Rs 40,000. Any income above that would have been taxed at the normal rate. In this manner there was some limit. In the subsequent laws even the concept of imputed income was dropped. My other question is whether the parliament that passed this law has ever tried to understand the same.
In this scenario I wonder the accounting sense of the critique that there cannot be any record of assets created out of taxed income in this country. The umbilical cord has been cut. Now tax has no relation with income and assets. If assets are to be recorded then an Asset Declaration Law without any tax will have to be introduced. Call it amnesty, gift, injustice to people not taxed on presumptive basis, etc, etc. Whatever it may be. But once declared as full and final discharge by the law and stamped by the Supreme Court of Pakistan there cannot be any kind of tax on assets so created. This is the reason why I called it “Asset Declaration Law”. It has nothing to do with income tax. The moral of the story is that when we wash dirty linen in a manner that nobody can identify the stains then many other crimes are also washed away in the process. This is the story of Asset Declaration Law.
The story does not end here. There is a question if the person being an importer requires that he can convert Rs 50,000 so earned into USD by buying foreign currency against Rupees from exchange companies. Its answer is: all legal. That foreign currency can be deposited in Private Foreign Currency Account. Legal and protected. The balance in foreign currency account can be sent abroad without any intimation to State Bank of Pakistan. No question and enquiry. With that USD he buys a flat in the UK. Now can state of Pakistan tax that flat held abroad whether declared or undeclared? The legal position is that tax on that income has been paid under a law and the funds have been transferred under a law.
This marriage between presumptive tax and foreign currency account is not accidental. It is an arranged marriage with the consent of elders who taught the parties to live peacefully in the land of pure. This story emerged in the 1990s and it is still there in some form. However, a very major part of income is still taxed on presumptive basis. One glaring example of continuation of this law is presumptive tax on exports. I strongly state that there should be complete zero rating of income tax for export income and no presumptive tax.
Furthermore, the amount so sent abroad legally can be used to pay under-invoiced goods. In this manner there is a saving of Customs Duty and Sales Tax at import stage also. This is not an amateurish exercise. This is a concrete well thought through system to create wealth outside Pakistan without breaking any law. Now if FATF and any other agency wants us to document the assets of Pakistanis in Pakistan or abroad we will introduce the Asset Declaration Law without any tax. The law introduced in 2019 was not the last. We need that almost every year. However, it will be necessarily required after every five to ten years.
The answer to resolve this issue is very simple. Abolish presumptive taxes in all forms including dividend, exports, etc, and provide the details of debits in foreign currency account where transactions are more than USD 500,000 in each year. I think my suggestions are workable. There are people who will not consider these suggestions as appropriate however with my 35 years’ experience in taxation on both sides of table this is set in stone and cannot be erased by sanctimonious sermons.
Copyright Business Recorder, 2021
Comments
Comments are closed.