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How to Unearth Black Money?

Dr. Ikramul Haq*


            In the context of the prevailing grave financial crises in the country 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 scheme, in addition to or by modification of Tax Amnesty Scheme 2000 to unearth this huge money to make it a part of the mainstream economy. However, it is important before launching such a scheme to identify the sources of generation of black money. If such sources are not eliminated, the black money will keep on growing. The Government must critically examine the features of such a scheme to unearth black money. The ongoing Tax Survey is only confined to business and immovable property, whereas there is a need for a wider plan to document the entire economy once and for all. The present regime must remember that half-hearted measures, typical of civil beauracracy, will not yield the desired results. The firmness, consistence and steadfastness must be shown to revitalize Pakistan’s economy. Our survival now lies in our economic salvation.


            Pakistan has been facing perpetual financial crises; the crisis of resources for its developmental policies, crisis to meet trade deficit, crisis on account of fiscal deficit and balance of payment, forex reserves and what not. One of the factors responsible for the present situation is the great speed with which black money is generated. 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 meant that everyday tax fraud exceeded Rs. 1.64 million. It is not the final count. We have yet not accounted for kickbacks in foreign trade, smuggling and foreign exchange racketeering, apart from narcotic trade and other criminal traffic. A conservative estimate is that Rs. 600 billion is generated every year 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.


            All attempts to prevent generation of black money did not yield the expected result.  High denomination notes were demonetised in 1946 to unravel black money gathered during the Second World War.  Notes worth Rs. 90 million were presented for conversion out of a stock of Rs. 1440 million. This was followed by enactment of Taxation of Income (Investigation) Commission Act, 1947. After the independence came MLR Declarations of 1958 to facilitate disclosure of income by providing certain immunities from the penal provisions. This scheme is the most successful in Pakistan so far bringing into mainstream economy Rs. 3 billion of black money and tax collected was Rs.1 billion. Since then, during the last 28 years, a number of money whitening and tax amnesty schemes have been announced, but none yielded the desired results. The most disappointing was the Tax Amnesty Scheme of 1997 prescribing rate of 7.5% to whiten the undisclosed income/asset. It yielded only Rs. 370 million, while the same year India’s Voluntary Disclosure of Income Scheme having rate of 30% brought Rs. 200 billion! Despite these lucrative amnesty and money whitening schemes, the size of the parallel economy kept on increasing and black money by and large remained outside the formal sector of economy.

The Government after realising that all efforts to detect black money had failed and the problem continued defying solution, enacted laws relating to the issuance of Special Bearer Bonds, Foreign Exchange Bearer Bonds, US Dollar Bonds & Certificates and a host of other such instruments. The object of these instruments was to mop up black money and to bring it out in the open so that instead of remaining concealed and idle, such money may become available for augmenting the resources of the State and for being utilised for productive purpose so as to promote 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 now 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.


            The aforesaid measures taken by the Government from time to time for unearthing black money and preventing its further generation did not yield the desired results. Incentives to wash off the past sins and to divert the evaders in future from gathering black money and stringent action threatened if they did, were all ineffective.  Even the Government announcements through a series of advertisements and circulars issued by the CBR showing its intention to waive penalties or interest and to grant immunities from prosecution if an assessee disclosed his income and wealth of earlier years which he had failed to disclose, could not lure the tax evaders. As a ritual the Government threatened rigorous punitive action against unreported tax evasion. Neither the Scheme nor did the threatened actions prevent proliferation of black money. Threats are ignored but hopes remain alive for another Amnesty Scheme!!


            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?

The answer is that all these singly or collectively are responsible for the prevalence of black money. Possession of lucrative wealth commands respect in society, notwithstanding how it is possessed. The habitual indifference of society towards how illegally income is earned and wealth accumulated, coupled with ineffectiveness of the legal system of punishing illegality, has encouraged people in criminal indulgence. It appears that there is no fear of coercive provisions under the Income Tax Ordinance, Customs Act, Excise Act, Sales Tax Act and the Wealth Tax Act, only to name the main tax laws, of penalty and prosecution. The powers the tax authorities enjoy for detecting concealment of income and wealth, namely search, seizure, survey, requisition of books of accounts, collecting information, inspecting registers of companies, compelling production of evidence, treating unexplained investments, money, expenditure as income and punishing the offenders, acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, have been rendered ineffective as if non-existing in so far as the object of such powers in detecting black money and stalling its regeneration is concerned.

            One of the reasons perhaps is the difficulty in making a distinction between black money and shedding its blackness and acquiring whiteness is so intense that the moment black money is earned, the concerned person tries to change it quickly into some other acceptable form. The speed with which it is done is so great that all evidence relating to its generation are either destroyed or rendered ineffective and new evidence and circumstances are concocted with finesse and dexterity to take their place as to provide a cover of legality, before the tax administration dares looking at the transactions. Real estate transactions are the first and foremost source of black money generation in the urban areas. The safest abode of the black money is real estate, foreign currency accounts at home and in offshore tax havens.

            Had the ultimate destination of black money been the real estate and domestic foreign currency accounts, it would not have done much harm to the economy as it has now been doing when the black money supports hoarding of essential consumer goods or criminalises politics and the police or the bureaucracy. In some way black is also beautiful, more beautiful than the white. Black money has made contributions to the construction of large hospitals, schools, colleges, skyscrapers, and five star hotels; gives impetus to electronic and automobile industries; encourages tourism, air travel, luxury coaches, amusement parks, supports high education abroad; facilitates medical research and treatment. Illustrations could be multiplied. But this is not to suggest that generation of black money is welcome for the good work done with its assistance and the destruction it has wrought on the economy and moral fabric of the society, the distortion it has caused in social consumptions and investment priorities; concentration of income and wealth in the hands of a few, it has been responsible for condoning and tolerating the ill-gotten wealth. The entire political and social culture became a handmaid in the hands of these elements. This only suggests that the uglier facet of the black is more frightening as it encourages corruption, hoarding of essential goods and criminalising politics which has to be wiped off first, if true democratisation of the country is to be achieved. The ugly aspect needs immediate treatment.

            The NAB has recently released (on humanitarian grounds!!) ex-Chairman, CBR, in exchange for Rs. 10 million and promises to reveal the corruption of Nawaz Sharif family. In this accountability? Those who released him should be ashamed of their act. It has distorted the entire image of NAB. Nobody is ready to believe that the humble and clean General heading the NAB released a corrupt man for only Rs. 10 million (those who know his wealth must be laughing at this amount!). The most ugly face of black money emerges in the corridors of powers, political as well administrative. If the present government, through the strong and draconian arms of NBA, wants to eliminate its political opponents, then its policies are fine. But if the purpose is to get rid of money power and corrupt politico-administrative system then it needs to reconsider the NAB’s working vis-à-vis the episode of ex-Chairman CBR.


            Our country is passing through the worst financial crisis of its history, i.e., the crisis of resources manifesting itself in the huge budgetary deficits. Revenue has to be collected and all measures both coercive and persuasive have to be taken in that direction. The Government has, therefore, to plan in terms of a well-thought-of amnesty legislation to draw upon the huge reservoir of the untaxed black money. It will have to diverse something innovative as in the past we have had many amnesty schemes, but all of them failed miserably. This phenomenon is not confined to us; other countries too have experienced this kind of recurrent pattern.

            During the 1980s, over half of the states in the United States had enacted tax amnesty legislation. A number of countries including India, Belgium, France, Ireland, and Italy did likewise. Argentina, Bolivia, Chile, Colombia, Ecuador, Panama, Peru, Mexico and the Philippines have all had tax moratoria more than once in the recent past. The primary motivation of the Amnesty Schemes has been to raise revenue. There is urgent need for one, in Pakistan to meet the resource crisis. The present one, Tax Amnesty Scheme 2000, is too limited and thoroughly ambiguous to meet the challenge of unearthing the huge wealth of black money.


            What should be the object, shape and content of the Scheme, has to be decided. Its contents should not repeat lacunae found in the earlier Schemes. While drawing it, the Government should rely upon its experience of those unsuccessful past endeavours. We cannot afford to have any Bond Schemes, similar to the Special Bearer Bond Scheme and other of its like, which were counter-productive and the bonds issued thereunder with the purpose of curbing black money became the source of its generation. Since the only purpose of the scheme is to bring in more funds to the Government treasury, the objections to such a Scheme, namely it provides signal to tax paying population that evasion can be profitable, its negative impact on future tax compliance as it raises expectation of a similar scheme in future, have to be ignored, keeping in view the fact that this s the last amnesty in Pakistan. There should be a law to the effect that in future no government will issue such a scheme.

The main features of the Scheme should be: ‑

  • All the persons, individuals, firms, companies, AOPs should be eligible to declare their concealed income and wealth.
  • Those who are under investigation (even before the NAB), whose houses or business premises have been surveyed and where the department has yet to establish concealment should be covered.
  • Persons in whose cases concealment has been detected and included in the assessment order, which has never been admitted by the assessee and is the subject-matter of appeal where matter is or likely to undergo protracted litigation before a final decision is arrived, should also be covered.
  • The persons who had made petitions to the Settlement Commission, and the Commission has not yet passed an order or admitted the petitions to be proceeded with, should also be covered.
  • All pending cases where prosecution has been launched should be compounded, on receipt of compounding fee. The person who takes advantage of the Scheme should declare on verification:

(i)         the manner in which the income was earned;

(ii)        the source of the income; whether it is activity, namely professional business or service, or whether it is the property, namely, house property, or any other corporeal or incorporeal property. The source has to be stated broadly, without specifying details as to how much individual source yielded how much income.

(iii)       the income/wealth belongs to him;

(iv)       how much income has been saved; and if saved, in what form the saving has been kept.

  • The rate of tax should be the maximum marginal rates applicable in the year for the assessment year 1999-2000 in respect of the category of the person, who makes declaration of income or wealth, without allowing any deductions or allowances. There should be treated as declaration in respect of the current year’s income. In view of cash liquidity problem, the declarant should be given the facility of paying in instalments.

            Immunities granted to the declarant should be:

            –           No penalty

            –           No additional taxes

            –           No prosecution

under the Income Tax Ordinance 1979, Wealth Tax Act, 1963 or any other law which is violated in whatsoever manner in earning the income or the wealth, which is the subject-matter of declaration.

  • The income/wealth declared should not be a starting point for any investigation or proceeding under the Income Tax Ordinance or the Wealth Tax Act or any other law or legal suits, etc.


            The desirability of a multifaceted amnesty scheme now is precipitated by the financial crisis. The prospects and expectation of significant revenue to the Government’s kitty demand ignoring dangers usually associated with such schemes. The dangers are that the scheme:

(a)        raises expectation for future similar schemes and thus encourages tax evasion; it tends to forgive known tax evader who was caught evading with great efforts and, therefore, it demoralises the tax administrator;

(b)        it puts premium on dishonesty as those who have been paying taxes correctly are at a disadvantageous position vis-à-vis those who did not because the latter had enjoyed their evaded income and are now let off easily without penalty and interest.


Despite these drawbacks, the present financial compulsions of the State demand such a scheme. The success of the scheme, however, depends upon conveying a message that future evasion will not be tolerated and shall be stemmed with a firm hand. The tax paying public should not have the impression that the Government only speaks loud but carries a small stick. The scheme would be useful in improving future tax compliance if the Government implements significant improvements in tax enforcement. The ongoing Tax Amnesty Scheme 2000 may be extended for another 2 to 3 months, till the date of filing of tax returns for Assessment year 2000-2001, with the above features included in it. It will bring the desired results for the country.

By allowing more time to the public, the Government will help them to bring their concealed wealth and hidden assets in the tax net and in the meantime it will also get ample time to complete the nationwide survey. The main aim behind the survey should not be only obtaining pieces of paper but also to ensure that all kind of properties, movable as well as immovable, are properly documented. This is perhaps a golden opportunity to overcome the present financial crisis by broadening tax base through concentrated and determined efforts, as the regime does not suffer from electoral obligations.

* The writer, a leading International Tax Counsel, specialises in international tax, Press, Intellectual Property, corporate and constitutional laws. He is Chief Partner of Lahore Law Associates (Email irm@brain.net.pk). He is member of Visiting Faculty of Institute of Direct Taxes in Lahore.  He studied law, journalism and English literature. From 1984 to 1996 he was associated with Civil Services of Pakistan as Deputy Commissioner of Income Tax. He is author of numerous books on Pakistani Tax Laws, some of which are co-authored with his wife, Mrs. Huzaima Bukhari. He has been awarded Doctorate of Law for his research: Tax Reform in a Quasi-Constitutional Perspective.

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