The government is unable to properly regulate foreign exchange companies or collect necessary information about currency remitted aboard through them in the absence of or required amendment to amendment to the Finance Act, 2008.
A leading Karachi-based chartered accountant and tax expert Muhammad Shabbar Zaidi told Business Recorder on Tuesday that the Federal Bureau of Revenue (FBR) had proposed an amendment to section 152 of the Income Tax Ordinance 2001 through the 2008-2009 Finance Bill.
An explanation was added to the section 152 to regulate exchange companies by collecting information about the money being sent abroad. The intention of the proposed amendment was to collect information about transfer of money abroad by the exchange companies.
The whole exercise was done to place regulations for checking misuse of foreign currency purchased from open market, which has been subsequently remitted abroad He was of the view that the FBR should immediately issue an income tax circular, clarifying to the exchange companies, about the deletetion from the Finance Act 2008.
The proposed "explanation" in section 152 of the Ordinance 2001 would empower the department to effectively control illegal movement of remittances through "Hawala" and "Hundi" system. Through the proposed amendment, the withholding tax regulations have to be applicable on the foreign remittances in the same manner as is applicable on payments made through the State Bank of Pakistan (SBP).
The tax withheld or deducted under section 152 on such transactions would also be effectively checked through the proposed amendment. The reporting of the exchange companies pertaining to foreign exchange outflow would have been improved due to the proposed amendment to the Ordinance 2001.
However, this important provision was deleted on promulgation of the Finance Act 2008 due to unknown reason. In case the "explanation" of section 152 has been made part of the Ordinance 2001, it would not only improve regulations of the exchange companies, but would also ensure deduction of tax, in case applicable on exchange companies.
Shabbar Zaidi said that the exchange companies were remitting foreign currency, directly or through banking companies (TT from foreign currency accounts) for import of goods or otherwise on the assumption that withholding provisions were not applicable. This practice had led to purchase of foreign currency from exchange companies and its remittance abroad for different purposes, including catering for under-invoicing of imported goods, he added.
To check misuse of foreign currency purchased from open market and its remittance abroad under the garb of imports or otherwise, an explanation was proposed to be added to sub-section (7) of section 152 to state "payments to non-residents includes remittance through foreign currency account and exchange companies applicable to transactions through such accounts and exchange companies."
This specific explanation was not incorporated in the Finance Act 2008, he added. He also suggested that there was a need to devise some rules for the exchange companies for proper regulations. There should be linkage between the FBR and the SBP for proper monitoring of the exchange companies.