In this part of this series of articles on the subject of 'money laundering', the topic of discussion is the status of our financial system to ensure that there is no tax evasion and money laundering. This part will also identify that unlike other civilized societies, in Pakistan, for various policy reasons there is a wide disconnect between the economic transactions routed through the financial system with those being part of overall fiscal system. This feature is hereinafter referred to as 'Fiscally Non-Documented Documented Financial Sector' (FNDDFS). In the past, this aspect of the economy has not been given due consideration and it has been wrongly assumed that fiscal non-reporting part is concentrated only or substantially wholly with 'cash' economy. For this reason, as a policy, we coined a weird term in our fiscal legislation such as 'non-filer'. There cannot be a legislated protection to non-filer. The purpose of this article and more to follow will be to identify that there is a need to create a 'connection' between fiscal and financial national database and provide a transition to the system for that purpose.
There is a need to critically examine FNDDFS. Unless FNDDFS is not studied, analyzed and sorted out properly there cannot be any substantial increase in tax collection. Furthermore, with a new financial paradigm appearing on the international scene, choices in this respect are almost non-existent.
In the post 'Panama Paper' scenario, since 2016, there had been many pertinent legislations in Pakistan on issues that directly or indirectly concern the matter discussed in the aforesaid paragraphs. Amongst others; there were three major changes, in that perspective. These are:
1. Inclusion of 'Tax Evasion' within the list of predicate crimes under the Money Laundering Regulations to comply with FATF recommendations;
2. Introduction of 'Prohibition of 'Benami' Act whereby maintaining any 'benami' asset has been made a criminal offence and the asset under consideration has to be confiscated if so held; and
3. Introduction and compliance requirement for description of 'Beneficial Ownership' of assets under corporate regulations.
There can be a separate debate on the validity and rationale of all these three legislations at this particular time however it cannot be ignored that aforesaid three fundamental paradigm changes are now part of the applicable financial and fiscal regulations in Pakistan. The public at large, banks and the government are required to ensure that the conditions underlined in these legislations are properly, adequately and completely complied with in letter and spirit.
In the context of the aforesaid regulations the point under discussion is the 'disconnect' between fiscal and documented financial sectors of the economy. This aspect has been examined in the following paragraphs in two perspectives. First, a comparison of recorded size and secondly the reason and basis of the said disconnection. The third part relates to the effects of 'Benami' laws.
Size of disconnect
The discussion in this part attempts to identify the disconnection of number of financial transactions undertaken through the banking system and those reported or accounted for through and in the fiscal system. At the outset, the figures referred below are personal 'estimates' to arrive at empirical results which may be further substantiated on the availability of specific data.
In Pakistan, the number of tax filers is around 1.5 million. This is obviously not the number of 'taxpayers' as there are over 70 kinds of tax withholding in the system. On the other side, there are around over 50 million 'active bank accounts' in the country. Both the figures are publically known and there is no dispute on this primary fact. The fundamental question which is the topic of this discussion with reference to possibilities of money laundering and disconnect between financial and fiscal system is whether or not it is possible to comply with the money laundering and FATF requirements unless a verifiable nexus between the overall financial system and fiscal compliance is assured.
Out of these 50 million bank accounts, a portion may relate to persons who are not in the tax net such as agriculturists. However, keeping in view the level of documentation of agricultural economy and the financial system it can be easily deduced that such number will not exceed 10 percent of the total number say approximately 5 million bank accounts.
Then there are bank accounts held by people whose transactions are not taxable such as housewives, students and person below taxable limits. An attribution of 25 percent of total accounts to this category will not be unjustified or a wrong estimate. If such 25 percent is also excluded then that exclusion will be numbering around 12.5 million bank accounts. Once these two exclusions are made then the remaining figure of active business bank accounts which should be compliant to fiscal system, effectively being those which should have been filers comes to around 32.5 million bank accounts.
Once that sum is deduced the same would have to be related to persons who file the return. For that purpose, bank accounts would have to be related to persons required to file returns of income. For that purpose, a 'statistical extrapolation' would have to be made. The same is as under:
All the businesses, in general maintain more than one bank account for practical reasons. Some large corporations may have 100 banks account or more whereas small businesses may have two or three active account. If an average proportion keeping in view the nature of our business enterprises around the country is taken into consideration then an average of 5 bank accounts per business would not be an underestimate. If it is so taken then it means that there should be at least 6 million persons who should file tax returns. As will be explained in the following paragraphs the issue under consideration is not only to identify the tax filers which are missing but to identify the reasons and bases for absence of corresponding relationship between two fundamental numbers relating to economy of the country i.e. the number of bank accounts and transactions therein and the tax filers. It is the author's view that all our efforts for any correction in the fiscal regime in the past failed mainly because some very pertinent aspects of economic activity being transactions with the banks and transactions within the bank accounts was never linked directly or indirectly with tax filing. In this respect, it is strongly stated that the discussion in the aforesaid paragraph does not in any manner suggest divulging access or information in the bank accounts with the fiscal authorities. The purpose is to state that compliance to money laundering provisions, expansion in the fiscal base, and any other step for creation of wealth is not possible unless there is an overall connection between the economic transactions and the fiscal and financial systems.
India has done it very successfully and their experience will be shared in the following articles on the matter. In short, in India there is a system duly computerized and linked with the Reserve Bank of India and their Central Board of Direct Taxes where banking transactions remain under radar in one form or another. The number of direct tax filers in India is over 60 million people and there has been an increase of over 40 million in the last five years.
All the estimates made in the aforesaid paragraph can be challenged, however the matter that remains unchallengeable is the fact there cannot be any sustainable improvement in the economy unless there is a relationship between relevant indicators such as financial transactions and tax compliance. Both aspects have to be dealt with simultaneously for sustainable growth.
The Effect of the Prohibition of Benami Transaction Act
This writer has written various articles on the subject of 'Benami' transactions, which may be retrieved from the archives of this newspaper to have a brief idea of the history, rationale and commentary on the prohibition of Benami Laws in Pakistan. As stated in those articles unlike other societies, in the sub-continent 'benami' transactions were given legal sanctity by the courts. In other words, 'benami' was an acceptable form of transaction under the Indo-Pakistan legal system. Taxation laws also accepted that 'Benami' assets can be held however the same will be taxed in the hand of ostensible owner. Nevertheless, this provision of taxation was never practically implemented. This resulted in a situation that there are substantial benami assets, in the financial system and outside that are not within the radar of the fiscal system. This means that that there are a huge number of benami transactions including 'bank accounts' which were legally required to be disclosed for fiscal purposes in the returns of ostensible owners but for various reasons this was not done. As a result, all the benami accounts remained outside the fiscal system.
At this juncture, where there cannot suffer any further turmoil in the system, the first thing this economy requires is confidence and stability. This requires a smooth and comfortable transition keeping in view the ground realities and the ultimate objectives. However, it is all the more necessary that unlike the past, fundamental errors and shortcomings in the system cannot be swept under the carpet. This requires a national consensus on certain fundamental aspects publicly. Whenever a house is rebuilt/repaired there is some discomfort for the residents if they continue to stay there. However, they remain confident that in the following weeks and months this discomfort will result in better living conditions. The same is true for the country's economy.

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