Combating the economic turbulence in Pakistan 1


E. U. KHWAJA

 Our beloved land is a gift of God to its 160 million inhabitants with abundance of resources spread over snow covered mountains, fertile plains, sunny beaches, unexplored deposits of oil, gas, coal, gold, silver, copper, precious stones, etc. Pakistan has produced the best doctors, scientists, lawyers, accountants, bankers, engineers and IT experts.

Our hard working labour force, a symbol of pride for us and smart business community, are great entrepreneurs capable of achieving the best results wherever an even playing field is available. Our stock market growth was phenomenal up-till the recent past, inducing a lot of foreign investment.

Pakistan has faced difficult times as well. The days when it was a newly born state, having very few, rather no resources. The death of its founder, the greatest lawyer South Asia has ever produced – Quaid-e-Azam and then the murder of its first premier Liaquat Ali Khan. The days when it was engaged in war by India in the year 1965 and then the fall of Dhaka in the year 1971. And most recently, in the year 2005, when northern areas of Pakistan and Azad Kashmir were shattered by the massive earthquake.

The response from the entire nation witnessed by the whole world was unimaginably spontaneous, the masses jumped to rescue the victims as one nation leaving all differences behind. Pakistan has survived each time owing to the strength and unity of its people, who always played a pivotal role in all the hard times it has ever faced. The then Prime Minister when called the nation to respond to his call for “Karz Utaro Mulk Sanwaro”, the nation responded with a zeal and contributed towards the noble cause by donating what possibly they could. I also recall the year 1958 when Field Martial Ayub Khan declared Martial Law and required the declaration of untaxed income, the entire community responded positively, promptly.

Today, Pakistan is facing the most difficult times of its existence; the law and order situation has worsened, complete lawlessness is rampant in all sectors of the society, the borders are insecure, specially after the recent Mumbai mayhem, which India is using to threaten Pakistan without any evidence of its involvement in the incident and the Indian media is playing as a conspirator. The country’s internal situation is also alarming, insurgency of religious fanatics, continued agitation of lawyers, inflation, corruption and favouritism are rampant, and the flight of capital to the place of safety under the circumstances has shattered the economic activity, while the recent crackdown on an exchange company has further created panic in the business community.

The time has come when all patriotic forces should get together, evolve policies and take immediate actions to bring the economy on the track of progress and prosperity as nothing can be achieved by blaming each other. Each one of us, one way or the other, is responsible for what has happened to this beloved country of ours. Its time that we all respond to the call and contribute according to our own capacity in the manner this beautiful country deserves.

SUGGESTED CHANGES IN TAXATION LAWS:

As a tax professional, I have certain suggestions which in my humble view can bring some positive change if they are implemented with sincerity. These are discussed in the ensuing paragraphs.

Income tax law provides the scope of taxation of resident and non-resident persons differently. A tax resident of Pakistan is liable to tax on his global income. However, where taxes are also paid beyond Pakistan, tax credit is allowed in computing the final tax liability. Resident persons are also required to submit wealth statement disclosing all assets and liabilities wherever located. In most of the cases, it is seen that resident taxpayers do not disclose their assets located outside Pakistan owing to a misconception that such assets are not required to be disclosed for tax purposes.

This results in becoming those assets as “unexplained” in terms of the Pakistan tax law. Resultantly, the income/ capital through which the assets have been acquired outside Pakistan also get the status of being undisclosed and therefore, liable to penal action by the tax authorities for which the Income Tax Ordinance, 2001 carries severe penalties for persons not disclosing their true income and unexplained wealth.

An “Investment Tax Scheme 2008” is presently in force which seeks to grant immunity from additional tax and penalties on unexplained assets/ income on payment of a 2% tax. During the last five months of its existence, the response has been insignificant owing to the lack of clarity and protection from other laws.

It is desirable to provide a safe passage to Pakistani residents, to repatriate their assets located outside Pakistan by granting specific immunity under the Tax Code and under the Foreign Exchange Laws as well. Accordingly, the Investment Tax Scheme, 2008 needs to be modified to incorporate the following:

(i) Section 2(b):

“Unexplained income/ asset” means any asset “located in Pakistan or elsewhere” for which the taxpayer has no explanation regarding nature and source and was chargeable to tax but could not be so charged under the Income Tax Ordinance, 2001, for any tax year or years ended on or before 30th day of June 2008 and where investment tax is paid in respect of assets located outside Pakistan, the immunity shall be extended upto the date of declaration as per section 3.

(ii) Section 3:

Investment tax shall be payable @ 2% of the fair market value of the asset at the time of declaration of all moveable/ immovable, undisclosed/ unexplained investments/ assets, as declared by the taxpayer under this Scheme, on the prescribed form during any time from 1st July 2008 to 31st December 2008 or such date extended by the Federal Board of Revenue.

(iii) Section 5:

Where the declarant has paid tax on his unexplained income/ assets in accordance with the Scheme, he shall be entitled to incorporate such income in his books of accounts and complete immunity from any taxation or proceedings under the Ordinance shall be available to such income/ assets.

It is, therefore, earnestly suggested that the Investment Tax Scheme, 2008 may be revamped in order to allow all such persons to disclose their assets/ investments located outside Pakistan on payment of a mere 2% tax thereon. While doing so, all the stakeholders viz. the business community, tax professionals, taxpayers as well as the tax collectors and the State Bank of Pakistan (which regulates the inflow and outflow of foreign exchange) should be consulted. It is also suggested that all forms of media ie electronic (including the Internet) and print media as well is used to run a campaign on a very large scale to let everyone know of such offering.

The workmen employed abroad remit a good sum of foreign exchange to Pakistan. It should be made compulsory for them to use banking channels to remit the money. Banks need to lower their charges and offer them competitive conversion rates. For the Pakistanis working abroad, a certain portion from their remittances may be invested in their name in some profitable venture. For this, lot of activities can be done.

One of them may to form an organisation like PIDC which could be “Pakistan Industrial and Agriculture Development Corporation” – (PIADC). PIADC may be registered as an autonomous body involving not only investors from outside Pakistan both Pakistanis, and non-Pakistanis but also professionals and businessmen from Pakistan as well as reputed bureaucrats. PIADC can indulge itself in corporate farming and other business ventures which will help in reducing unemployment in Pakistan and generating a lot of opportunities for the people who want to work. Moreover, it will also help in rewarding the investors who would be making investment from outside Pakistan. But this all can be achieved by honest hard work and above all sincerity of purpose and nothing else.

Suggested measures for SBP:

Pakistan today is facing serious deficiencies in its foreign exchange reserves due to the prevalent conditions resulting in the flight of capital, rapid depletion of foreign currency reserves and adverse trade balance. Accordingly, any scheme to attract the inflow is the need of the hour. The SBP, in its handout of 19th October 2008, while dispelling reports on the foreign currency accounts, has clarified as under –

(i).However, subsequently Protection of Economic Reforms Act, 1992 (PERA) was promulgated which provides complete freedom to an individual to bring, hold, sell, transfer and take out foreign exchange within or outside Pakistan. This legislation has a categorical overriding effect over Foreign Exchange Regulations Act, 1947 (FERA).

(ii).The spokesman clarified that due to contradictory legislations in place, as pointed out above, it has become difficult for the SBP to effectively monitor and supervise foreign exchange activities as PERA 1992 has an overriding effect over FERA 1947 and all other laws. As an example to explain the effect of this, it may be noted that under FERA 1947, an individual cannot take out of the country any amount more than US $10,000 in cash whereas PERA 1992 provides complete freedom in this respect.

(iii)As regards imposition of monetary penalties on account of violations of foreign exchange rules and regulations, the spokesman pointed out that at present there is no such provision in FERA 1947.

The fact that the PERA 1992 was amended in 1999 vide Ordinance dated 17 December 1999 where the immunity was classified in the areas specified therein:

“Sub-section (2):

(2).Nothing in sub-section (1) shall apply to –

(a)……………..

(b)……………..

(c)……………..

(d)……………..

(e).earnings or profits of the overseas offices or branches of Pakistani firms and companies including banks; and

(f).any foreign exchange purchased from an authorised dealer in Pakistan for any purpose.”

The emergence of secondary market by granting licenses to exchange companies; the two legitimate counters were simultaneously made available ie the normal banking channel and the counters of exchange companies as secondary market. It is interesting to note that there are several occasions where the SBP directed the business community to utilise the counters of secondary market.

In view of the above framework and the absence of clarity as to the parameters of secondary market, the flight of capital couldn’t be stopped and this has seriously damaged our economic activities which have to be rapidly repatriated and restored.

It is thus suggested that those Pakistani residents who are involved in this activity should be given a safe passage to bring back capital sent outside Pakistan as early as possible. The SBP should come up with a scheme in collaboration with the Investment Tax Scheme 2008 granting complete immunity from any action under the Exchange Control Act for those who are declarants under this Scheme and remit the foreign currency through normal banking channels and the purpose of remittance be indicated “To avail the amnesty under the Investment Tax Scheme 2008”.

It may not be possible for the declarants to remit the entire assets immediately. However, the SBP’s scheme may provide a reasonable time frame to bring in the liquid cash available forthwith and where the assets are in the shape of investment in stocks/ financial market and immovable properties, the declarants may be allowed to bring in the yield of such investment and the investment itself on disposal or maturity.

Suggestion to the Planning Commission of Pakistan

Our labour force working abroad is remitting billions of dollars every year which is wholly passed on to the beneficiaries. Please consider adopting the Korean Model whereby a reasonable portion of such remittances is diverted to investments which presently may be routed through ICP or NIT and overseas Pakistanis who are keen and willing to make investment in this country may be provided priority while negotiating privatisation deals locally.

Regional Development Authority (RDA) manned by honest, competent and energetic persons may be formed both in the industrial as well as agricultural sector who should be assigned the job to use these investments by way of equity participation or against fixed returns on the optionof the investor. Our agricultural sector has great potential but presently the yield per acre is decreasing primarily due to shortage of water, lack of appropriate fertiliser, seed and lack of funds.

RDAs acquiring the funds/investment may be used to evolve the culture of corporate farming, investment in the development of infrastructure including roads and small dams. The Government of Pakistan should lend them full support by providing land, granting long leases and also participate to some extent in the equity of such ventures and by appointing a nominee on the Board of Management of such RDAs who would act as a co-ordinator between the public and the private sector for the smooth running of the business.

The suggested exercise needs to be finalised in consultation with the nominees from all stakeholders which appears to be the only way to become self sufficient. This, in my humble view would result in making Pakistan a progressive country.

Courtesy: Business Recorder

http://www.brecorder.com/index.php?id=849343&currPageNo=1&query=&search=&term=&supDate=


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One thought on “Combating the economic turbulence in Pakistan

  • Ashok

    I think INDIA is still the Market Leader in Case of IT Sector.
    If the economic condition of pakistan contnous this way then the day is not far away when the inflation would reach 100%.
    Pakistan should try to learn something from India, the way it is growing, the way it is maintaining piece and prosperity.
    The only way to come out of this drasting economic crisis is – to stop supporting the terrorist activities.