Self-contradictory Acts
Dr. Ikramul Haq
The rulers of Pakistan are fond of making self-contradictory statements and acting in a diametrically opposite manner than what they publicly profess. The incontrovertible evidence of it came during the recent two-day [March 29-30, 2005] international seminar on ‘Anti-money Laundering’, organised by the State Bank of Pakistan in Karachi. Prime Minister Shaukat Aziz, while addressing the seminar, claimed that “the government is coming up with new laws to effectively control money laundering which is an international challenge”. The worthy Prime Minister conveniently forgot to mention that the Government itself has provided a free hand to money launderers assuring them that no question would be asked by the tax authorities if they remit their ill gotten-money from outside through banking channels and surrender the foreign currency to the State and get Pakistani rupees as encashment.
In the Income Tax Ordinance 2001, promulgated on the dictates of IMF on 13 September 2001, a special provision [section 111(4)] has been inserted facilitating the money launderers to remit (laundered is more appropriate term) their ill-gotten money through banking channels and surrender the foreign currency to the State Bank and get Pakistani rupees as encashment. In this way they can escape not only taxation but any query from CBR. This scheme presumably announced as a measure to bring huge foreign funds to Pakistani economy succeeded immensely as foreign reserves of Pakistan crossed the US$ 12 billion mark in the wake of this facility. This scheme has been used liberally and cleverly by the Pakistani drug syndicates and tax dodgers to launder their money through State patronage. In the presence of this law can anybody take Prime Minister seriously in his so-called announcement of combatting money laundering and?
Money laundering is particularly damaging to economic and social fabric of developing countries, leading to potential increase in crime and corruption, impending damage to reputation of financial institutions and markets, reduction of foreign private investment, possible destabilisation of financial markets and weakening of financial institutions, loss of tax revenue and loosening control over economic policy. Pakistan has been the worst victim of money launderers as since 1977, the successive governments showed an extremely benign attitude toward corruption, drug trafficking and tax evasion.
In Pakistan, the banks, insurance companies, non-banking financial institutions, investment companies, money transmitters and real estate agents are all targets for money launderer. The financial institutions inadvertently or otherwise support money laundering by providing means to convert cash into different types of financial instruments, to convert the currency of one country into the currency of another and to transfer funds to other financial institutions[1].
The various governments in Pakistan have never bothered to unearth laundered money rather always joined hands with the tax evaders and money launderers by providing them unprecedented concessional schemes to whiten their ill-gotten wealth. These schemes were announced by the governments on the recommendations of CBR’s top management (corrupt mafia) in the name of improving tax collection! In Pakistan the money accrue through land transactions, drug trafficking, and suspicious transactions involve money laundering. Everybody knows that kickbacks are involved in import of textile machinery but not a single businessman has so far been prosecuted on this account by CBR.
The CBR, according to all available data and indicators, is the most inefficient, incompetent and corrupt arm of the Government[2]. It is in fact ruled by a band of mediocre, corrupt, power-hungry and sycophants[3]. The CBR, responsible for the collection of federal taxes, has miserably failed to introduce any tax intelligent computerized system, despite the fact that it has a market-wage oriented company, Pakistan Revenue Automation Limited (PRAL), at its disposal, to monitor the economic activities of corporate/business sectors. This failure coupled with corrupt practices (according to some estimates at least Rs. 200-300 billion go annually to the pockets of tax officials) has contributed to generation of enormous black money in Pakistan.
Large-scale tax evasion and the existence of a large black economy while resulting in loss of revenue to the State, tends to reduce the built-in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary pressures and raise the prices of real property. In the context of the prevailing grave challenge to combat terrorism, coupled with money laundering crises, and the problem of ever-growing black money, (which according to official and independent experts is around Rs. 1.8 trillion, about 70 % of the total economy), there is an urgent need to launch a well-thought for anti-money laundering law to block this huge money becoming a lethal weapon in the hands of mafias who now control economy as well as the governments. However, it is important before launching such a law to identify the sources of generation of black money. If such sources are not eliminated, the black money will keep on growing no matter how stringent laws we make.
Pakistan has been facing perpetual crisis of resources for its developmental policies, crisis to meet trade deficit, crisis on account of fiscal deficit and balance of payment, and what not. One of the factors responsible for the present situation is the great speed with which black money is generated. The Central Board of Revenue is directly responsible for this as its mafia-like operations has helped the people to avoid tax on incomes by paying them “due share”. Through the infamous system of SROs[4], the CBR’s top officials provided “legal” ways and means to the mighty sections of society to amass huge wealth that is now threatening the very survival of State. This black money in the hands of corrupt politicians, bureaucrats and terrorists has played havoc with the entire human community across borders.
A conservative estimate is that Rs. 600 billion is generated every year in Pakistan by the parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs. 300 billion and Rs. 500 billion. This makes a whooping Rs. 1000 billion. When the presence of black money is so apparent, why its criminal accumulation and generation are not revealed and the offenders punished, is a question which has been baffling honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties? Those who plundered the wealth of the nation were set free to have a good time in “exile” and those who abused powers are being invited to come again for ruling and looting whatever is left. Many renegades of Pakistan People’s Party of Benazir Bhutto and Muslim League (Nawaz Group) who were facing trials for financial malpractices or plundering of banks loans are now enjoying ministerial positions in the Jamali Government, backed by General Musharraf.
It is not possible to determine the precise amount of revenue loss and size of black money or informal economy in Pakistan. Revenue loss estimated by World Bank because of smuggling in 1992-93 amounted to 5.08 billion dollars. In 2003 its quantum was estimated at over 200 billion dollars. Another report estimates revenue loss, because of distortionary tax regulations and administrations, at Rs 40 to Rs 45 billion in 1989-90 and Rs104 billion in 1995-96. Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan.
According to figures released by CBR on 30 May 2000, the parallel economy is growing at an alarming rate of 22.93% per annum. Every fifth rupee transacted in Pakistan is black, according to the volume of black money generated in the year 1997-98 at Rs. 600 billion or 15 per cent of Gross National Product. This means that everyday tax fraud exceeds Rs. 1.64 million. It is not the final count. We have yet not accounted for kickbacks in foreign trade, smuggling (e.g. huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic.
Dr. Aqdas Ali Kazmi, Joint Chief Economist, Planning Commission of Pakistan has stated in his research paper Tax Policy and Resource Mobilisation in Pakistan that 70 percent part of economy consists of 36 percent ‘pure’ black economy, 18 percent exempted economy, 9 percent illegal economy, 4.5 percent unrecorded economy and 2.5 percent informal economy (unreported economy). His study says that the problem in the low resource mobilisation is the rigid system of taxation, and the emphasis of the government to increase revenue, ignoring the details of long-term policy measures.
According to very conservative estimates the real tax potential of undeclared wealth in Pakistan is between PKR 700-1000 billion. The successive governments have utterly failed to persuade the Pakistani people to pay taxes due from them. The common argument against paying taxes is that money so collected is spent for wasteful purposes and on unprecedented benefits enjoyed by high placed civil-military bureaucrats and corrupt politicians. In this tug of war, the tax machinery is minting money by harassing the public in the name of army rule. It was the first time in the history of Pakistan that during the General Pervez Musharraf’s take-over a military ruler became a tool in the hands of tax bureaucrats for exploiting the general masses for self-interest. The poor people of Pakistan were asked to pay 23% General Sales Tax, small businesses were asked to pay minimum tax of 0.5% on their turnover irrespective whether they earn taxable income or not. On the contrary, the military elite and influential classes were granted unprecedented tax exemptions.
Judging from different studies quoted above and reports published in print media from time to time, Pakistan’s underground economy has the following salient features:
- Since 1979 (courtesy Gen. Zia’s legacy of speed money culture and its following by all the subsequent governments, notably that of Benazir Bhutto and Nawaz Sharif), Pakistan’s underground economy has developed at a surprising rate. Its large size ranging between 22% to 35% of GDP is a cause of great concern for both the official and independent economists.
- Its manifestations are very wide. It is not only large and all-pervasive but also exists in daily life of every Pakistani. It includes production of fake and substandard goods, smuggling, the “black society” economy, illegal business of sexual transactions and contraband toxicants, massive infringement of copyrights, interloping, tax evasion and avoidance with the active collaboration of tax officials, money corruption and rent seeking [exchange of power for money] activities of government officials, plundering of bank loans, just to name a few and significant ones.
- Massive migration towards big cities confirms that a huge population of Pakistan is directly engaged in underground economic activities. The large-scale mobility of people is also a contributing factor in generating underground economy e.g. huge demand of local private houses to accommodate the mobile population.
- The active participation of government officials is the most disturbing feature of Pakistan’s underground economy. The rent-seeking activities of the government functionaries emerge in an endless stream. They are the single most important catalyst for accelerating the growth and sustainability of underground economy. The State has miserably failed to check rampant corruption amongst their officials. They have emerged as the most powerful mafia whose control over the underground economy is now invincible.
Why has Pakistani underground economy been evolved so rapidly over a period of last 20 years? This question baffles every concerned citizen; however there is no one adequate answer it to it. There were multiple factors leading to this phenomenon, most notably the State-sponsored corruption and deliberate tolerance to malpractices. Pakistan by all means has a soil, which proved to be very suited for the propagation of an underground economy since the very early days of Independence when allotment mafia came into existence and many notorious elements turned rich overnight. They are still dominating the ruling structures as money power they enjoyed without putting any effort in achieving it.
The successive civilian governments in Pakistan provided many lucrative laundering schemes to the drug traffickers, rent seekers and tax dodgers (although these were termed as good economic measures to dig out black money!).These schemes include Bearer National Fund Bonds and Foreign Exchange Bearer Bonds, Special Bearer Bonds, US Dollar Bonds & Certificates and a host of such other instruments. The object of these instruments was to mop up black money (mainly earned through illicit drug transactions) and to bring it out in the open so that instead of remaining concealed and idle, such money may become available for augmenting resources of the State and for the utilization of social and economic planning. The said schemes, however, proved counter-productive. The bearer bonds were converted into alternate currency and exchanged hands at a premium. It is an officially admitted fact that ‘the instrument to render black money white was itself, used with vengeance to reconvert white money into black’. The Special Bearer Bonds carry a premium in the market and an increase in the premium was witnessed as the date of maturity of these bonds came closer. Under the Scheme any one can buy the bonds, present them to the Government and claim refund along with a specified interest. The source of investment in their purchase could not be questioned; whether it was white or black money[5]. Thus, the drug barons could get their money and assets legalized with no questions asked about the source of such ‘‘income”.
During the last 15 years, money launderers in Pakistan hardly needed any international channel for money laundering. All the support from the State was available at home. Even today, if anybody brings money (earned from drug trade or any smuggling operation or own untaxed money by hiring the services of local money exchangers to show it as remittance) in Pakistan through normal banking channels, the State bank and tax authorities do not pose any question about the ‘‘source”. Drug traffickers and terrorist apparatus remit millions of rupees into the country every year from bank accounts maintained in various countries in fictitious names. This money in the hands of terrorist networks has made them invincible, besides making life harder and harder for those who earn from legitimate sources.
The recurrent appearance of amnesty schemes and money whitening instruments/modes shows that the State has conceded the failure of its tax machinery in performing its main function of collection of taxes. This nation has become addicted to easy money and such schemes/instruments have become a routine matter for them. The people being hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less the amount than what they were required to pay under the normal income tax/wealth tax regime. It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who have been paying their taxes honestly at much higher rates than those offered to tax evaders (ranging between 5 to 10%) under such Schemes.
The ugliest face of black money emerges in the corridors of power, political as well as administrative. No other country than Pakistan knows better the dangers of allowing money launderers and drug traffickers to get the upper hand. We are at present not just facing a drug-abusing population of nearly 4 million, mostly young, but also many terrorist organisations which threaten the government itself. The fact is that a cartel or a group of cartels have become so powerful that they can work out agreements with terrorists and saboteurs to undermine the authority of the State.
Is Prime Minister of the country, who also holds the portfolio of Ministry of Finance, not aware of the fact that even today CBR in its Letter No. F.4(34)/ITP/2002 dated 29-02-2002 reaffirms that “the Department would adhere to its policy of not probing the foreign remittance” brought into Pakistan by any “person”? Every now and then the State announces a tax amnesty scheme that favours tax evaders, smugglers, corrupt, extortionists, drug barons and criminals [presently it is available in permanent form in the shape of section 111(4) of the Income tax Ordinance 2004]. Such schemes are a spank for the honest taxpayers [making them appear as a foolish lot for paying taxes]. An extortionist in Karachi or Lahore can decriminalize his ill gotten money through such a scheme but the poor businessman who paid that extortionist due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return! The situation needs to be corrected. The facilitation of whitening untaxed money should be restricted ONLY to genuine business investors so as to bring the capital back into formal sector by paying some percentage as tax (kuffara) and not for the criminals, corrupt and unscrupulous elements in society.
The Government, if really sincere to promote voluntary tax compliance and counter money laundering, must announce Compulsory Public Disclosure of Assets Scheme requiring the following to make their assets and liabilities public:
- High ranking civil and military officials
- All the MNAs and MPAs
- Judges of the superior and subordinate courts/members of Tribunals
- Businessmen/Directors of all the companies who availed loans exceeding Rs.10 million from any financial institution
- Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc
The above privileged classes of society should act as examples for others. Their declarations can inspire the common people to pay their taxes honestly and it will help encourage voluntary compliance. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes, as suggested above, which alone can ensure proper and voluntary tax compliance in the country.
Pakistan needs to develop a permanent structure in all the institutions specifically CBR, Federal Investigation Agency (FIA), Securities and Exchange Commission of Pakistan (SECP) and State Bank so that the money laundering issue can be effectively tackled. Special courts should be established and judges having expertise in financial and banking matters should be appointed, to hear money-laundering cases. The judges of such courts must be especially trained in the fields of accountancy, and money laundering. There is an urgent need for introducing policy and structural changes in the banks. It is unfortunate that ‘Benami accounts’ are widely accepted in the public and private sector banks. Presently, there are 28.8 million accounts with the Pakistani banks, out of which 14.8 million were opened against personal names whereas only 432,916 are liable to pay taxes. The State cannot tap the real potential of revenue potential unless stringent measures are taken to combat money laundering and eliminating parallel economy through proper documentation. This will automatically broaden the tax base, besides freeing the society of many evils.
There is a need for a wider plan to document the entire economy once and for all. The present government must remember that half-hearted measures, typical of tax bureaucracy, will not yield the desired results. The firmness, consistence and steadfastness must be shown to counter money launderers, terrorists and tax evaders. Our survival now lies in freeing the society from the clutches of the corrupt.
It is tragic that in a country where billions of rupees are being made on daily basis in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low and the Government is least bothered to tax undocumented economy and benami {name-lender) transactions. The mighty sections of society are engaged in these transactions and CBR being their handmaid has neither will nor ability to tax them. It exposes the uselessness of CBR as an institution to tap the real tax potential of the country.
The definition of ‘business’ given in section 2(9) of the Income Tax Ordinance, 2001 covers “adventure in the nature of trade” and yet our tax machinery is sitting idle causing colossal loss to the national exchequer by not bringing adventures in the nature of trade in real estate into tax ambit and giving undue tax exemption on gains arising on speculative transactions in shares and stocks. Our tax-to-GDP ratio can rise to 20% in one year if we tax speculative dealings in real estate (this will also help in promoting construction industry as skyrocketing prices of land will come down) and bring black economy into tax net. Instead of performing its prime duty, that is levy of tax where it is due, the CBR is busy in constituting committees to ponder over many issues relating to tax policy and administrative reforms, which are in fact the job of Parliament. It appears that the CBR is more eager to do the job of legislators rather than performing its primary function of levy and collection of taxes.
Pakistan is passing through the worst crisis of resource mobilisation manifesting it in the huge budgetary deficits. Revenue has to be collected and all measures both stringent and persuasive have to be taken in that direction. The Government has, therefore, to plan in terms of a well-thought-of anti-money laundering-cum asset seizure legislation to draw upon the huge reservoir of the drug and untaxed money. In case swift action is not taken to seize money and property arising out of corruption, tax evasion and narco-arm-trade, the day is not far when we are declared a nation of terrorists, as our present tolerance to ill-gotten money is a suicidal path leading to self-annihilation.
Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram works for multi-disciplinary firm HUZAIMA & IKRAM [fax: +92 42 5310721, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk ]. He is a member of visiting faculty of Lahore University of Management Sciences (LUMS) and Lahore Institute of Tax Education (LITE). He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani tax laws and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari.
[1] Statement by the Chairman Securities and Exchange Commission of Pakistan (SECP), Dr Tariq Hassan, while addressing a seminar on “Countering Money Laundering”, organised by SECP’s anti money laundering cell at Lahore University of Management Sciences on December 29, 2003. These observations by the Chairman of SECP are eye-opener. The Chairman further admitted that Pakistan is targeted by the money launderers because they generally attack the countries having weak anti-money laundering regimes.
[2] Dr. Ikramul Haq, “ Pakistan: Drug-trap to Debt-trap”, May 2003, page217
[3] Ibid
[4] Pakistan is a unique country where tax laws are controlled by an administrative authority, CBR, by issuing Statutory Regulatory Orders (SROs). Through these notifications unprecedented benefits are given to ruling classes e.g. exemption from duties in importing cars by President, Army Chiefs and Governors, just to mention a few.
[5]How to Unearth Black Money? , Dr Ikramul Haq, Business Recorder, July 18, 2000