Federal Finance Minister Mohammad Ishaq Dar has done well to timely clarify that there shall be no tax on foreign remittances. He has, therefore, laid to rest any apprehension that may have risen in recent days. How ironic it is that those who man country's tax machinery often lose sight of the fact that the law provides a legal cover and therefore any remittance from abroad shall be exempt from any inquiry by tax offices. Dar's intervention to protect this vital inflow, which is by and large, is keeping the country's economy afloat and the current account deficit under control ($1.4 billion). Pakistan is likely to suffer a large trade deficit of 17 billion dollars. And, 16 billion dollars received in remittance would cover this trade gap. Even a fall in international oil prices would not have been able to bridge this trade gap since saving on POL import is equivalent to higher imports of other commodities. And, exports are also weak due to softening of international prices and their fall may be due to supply side constraints such as energy shortages, infrastructural collapse and low labour productivity.
The forex amount sent into Pakistan is an inward remittance. It represents home remittances of hard working labourers in the Middle East and elsewhere. The major irritant which hampers documentation or allows for under-invoicing of imports is misuse of private forex accounts - which allows sending abroad of dollars officially through banking channel. The existing law allows this. The revenue officials, under the law, can question feeding of these private forex accounts through cash deposits. The present law does not stop them. Thus, it is a smokescreen used by the tax hounds for their poor performance in raising the direct tax base and their failure in squeezing the cash economy.
Taxing inward remittances is not a tax issue. Exchange company reforms are needed. A tax collector can inquire about the source of cash dollars deposited in private forex accounts. They are only prohibited from investigations into remittances converted to rupees in a bank-to-bank transaction. Conversion of tax paid rupees saved to purchase dollars deposited in private forex account is allowed, provided banks obtain an encashment certificate. And, banks do. Similarly, sending dollars from one's account to purchase property is also allowed - provided that property is then locally declared.
Similarly, tax proposals submitted by the State Bank of Pakistan to Ministry of Finance need to be taken seriously. Bank deposits, in the last few years, increased because of wealth creation in rural Pakistan. A fall in commodity prices this year will certainly adversely affect the rise in deposits in FY16. Thus, the tax on cash withdrawals needs to be withdrawn and accessing bank accounts without court permission is not advisable. Depositors need to have faith in the banking system to strengthen our financial base.
Last but not least, our policymakers are required to draw some valuable lessons from the story of Philippines which is no longer the 'Sick man of Asia'. It was on May 22, 2015 that its central bank said that the country's current account surplus is expected to reach a record $14.2 billion this year. In this regard, remittances will play a major role as money sent home by Filipinos working and living abroad will likely grow five percent this year, after hitting a record $24.31 billion in 2014.
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