The second phase: 'Panama Leaks - A Blessing in Disguise'

In 2016 when there was revelation of the 'Panama Papers' this writer wrote various articles for this newspaper to explain the concept of 'offshore companies' and assets held by Pakistani citizens abroad. These articles were late compiled in the form of a book 'Panama Leaks - A Blessing in Disguise'. This revelation was followed by the 'Paradise Papers', the 'Dubai Leaks', etc.
In the subsequent articles the author also presented other dimensions on the subject and came to a conclusion that there is a need for a comprehensive 'Foreign Asset Declaration Act' in Pakistan. All these matters are under discussion now at various forums and the Prime Minister of Pakistan has indicated legislation on the subject. It is pleasant to note that we are entering into the second phase of the debate that started in 2016. The National Security Council of Pakistan in their meeting on February 2, 2018 took up the matter of politicization of 'Financial Action Task Force' [FATF] and warned that there is a fear that this matter which is totally financial subject may be used to malign some countries on political spheres. All these events therefore reveal that a new chapter is now open in the world economics and financial sector. This relates to disclosure, taxation and other aspects of assets held by citizens of one country in another country.
There has been another positive development in relation to this matter. The Supreme Court of Pakistan issued a suo motu notice on this matter on February 1, 2018. That has been fixed for hearing on February 15, 2018. The observation of Supreme Court in the preamble of the notice reflects the sentiment of every sensible Pakistani citizens. It states:
"[I]t appears that such money is siphoned off without payment of taxes through illegal channels and represents either ill-gotten gains or kickbacks from pubic contracts. Such money creates gross disproportion, inequality and disparity in the society, which warps economic activity and growth, constitute plunder and theft of national wealth...
"The society and economy of the country is being bled by illegal and surreptitious theft of national wealth, which is stashed in foreign countries, the same could be utilized for the welfare of the people in projects as education, health and public welfare. Such delinquency constitutes violation of the fundamental rights of the citizen of Pakistan and is a matter of greater public importance.
The Supreme Court of Pakistan has accordingly called Federal Board of Revenue, State Bank of Pakistan, Securities & Exchange Commission of Pakistan and Ministry of Pakistan to appear and provide explanations and information about the matter. As stated earlier, this is the second phase of the matter that started in 2016. The ultimate result will be a correction.
This writer has been writing on this matter for the last two decades arguing that tax and foreign exchange regimes have been 'designed' in a manner that supports non-declaration of real income and assets of the citizens and at the same time, a parallel foreign exchange regime provides ample and unsupervised movement of such wealth outside Pakistan. In short, what we see today is essentially the result of policies adopted in post-1990 regime. Now we have reached a state where results are becoming obvious and economy is moving towards stagnation primarily due to stagnation of real tax collection and accumulation of assets outside Pakistan. It is very encouraging to note that international steps including activation of FATF and local awareness, are leading to actions, including the suo motu action of the Supreme Court that will bring forth the issue that was being placed under the carpet for a very long time.
In this regard, it would be therefore essential to decide whether the present position and status as rightly identified by the Supreme Court is the result of 'policy' weakness/ distortions or it is a case of 'maladministration'. There is no excuse for maladministration; however, it is also important to note whether such maladministration was the consequence of improper legislation on the subject. This aspect has been very briefly discussed in the following paragraphs:
'Assets record' and the 'income record' are two different subjects. All the income tax laws and regulations throughout the world are designed to reveal the income chargeable to tax during a particular period. That information is essentially and fundamentally the record of income earned by that person. How such income has been utilized is not the objective of income tax legislation. In other words, income is taxed not the wealth. That is the right approach. However what we did in the post-presumptive tax regime is that an amount not related to income has been deemed to be income for income tax purposes. That amount has no relation with the income earned from that activity or assets so created. So as a policy real income and assets fell outside the system. In other words, now FBR has no record of income earned even by the persons who have filed tax returns if the same fall under the presumptive regime. When the FBR, by law, does not possess the record of income then there cannot be any record or information about the assets. This is an obvious situation and the author wonders about the response that would be provided by the FBR to the Supreme Court on the question being raised.
In addition to the same, there is a half-hearted attempt to obtain the asset record in the form of Wealth Statement as prescribed under Section 116 of the Income Tax Ordinance, 2001. Notwithstanding any other discussion on this subject, there is a strong view that wealth statement in the present form and in the presence of presumptive tax regime cannot provide any positive result or information. Lastly, even if it does so, a wrong disclosure in the wealth statement can effectively lead to a penalty of Rs 25000 only. In short, the author wonders whether or not our taxation laws provide space for the FBR to identify the important subject raised by Supreme Court about the foreign asset.
In this discussion we also left aside the agricultural income and assets created from such income in and outside Pakistan that is outside the ambit of Federal legislation. For provincial governments this is not a subject to deliberate. This is another handicap.
The second aspect is the transfer of untaxed assets out of Pakistan. This is a foreign exchange issue. This author has written various articles on the subject highlighting the fact that in Pakistan we are running two parallel systems of exchange regulations. One is regulated by State Bank of Pakistan whereas other is essentially unregulated. We have a law by the name of 'Private Foreign Currency Accounts (Protection) Ordinance, 2001. This law is in itself a complete regime of foreign exchange. In very short summary it can be stated that under this law, any Pakistani individual whether being a taxpayer in Pakistan or not, can open, operate, transfer foreign exchange out of Pakistan without any approval from State Bank of Pakistan. The only condition to be followed by such individual is bring the money in that account from outside Pakistan or use the untaxed or taxed Pakistani rupee for acquiring USD from money changers and currency exchange companies in Pakistan. In short, there is a mechanism available in our system to transfer funds out of the country without any tax enquiry or report.
Moreover, the process of 'Hawala' is in operation for the reason that a substantial sum is to be remitted to Pakistan by expatriate Pakistan. That remittance is and can be routed in a manner, being a derivative of hawala that creates/accumulates assets outside Pakistan without any physical and actual transfer of funds from Pakistan. The author is yet to identify the legislation that will regulate the hawala transaction.
The aforesaid description reveals that it is possible under the law at present to have assets in Pakistan which are not in the records/information of FBR and SBP may not be a party to the transfer of foreign exchange from this country held in the name of a Pakistan citizen, whether out of taxed or untaxed money. This is a ground reality.
It is a positive step that Supreme Court has taken up this matter. National and international developments on this subject will lead us to correction and it is the responsibility of all citizens of Pakistan to assist the institutions on this subjects to provide sustainable growth strategy for Pakistan.
The aforesaid comments are very short description of issues raised. The matter is complex and complicated. It is a time to deliberate in a manner that there is long-term solution for the country.