Pakistan’s BOP Blues: Demons in the Debit Side—An Elitist Analysis of the Outward Remittance Regime—Bringing the Tax Pincer Back In
Keywords:
Outward remittance regime, balance of payments (BOP), rentier state elite, foreign exchange regulations, foreign exchange management, foreign currency accounts, cardinal questions framework, external sector, Pakistani elitesAbstract
The paper seminally develops (in some respects, reinforces) an alternative analytical framework of foreign exchange management in a developing country context in which, along with the standard toolkit of foreign exchange regulations, the tax system also plays a pivotal role. The paper spatially anchors itself in Pakistan to make an attempt to fill the knowledge gap, which, inter alia, emanates from an excessive focus on increasing inward remittances through exports, foreign direct investment, and workers’ transfers, and an equal absence of attention on decreasing outward remittances on account of imports, commercial imports, travels, private transfers and insurance. It is argued that outward remittances can be better checked by bringing in the tax pincer to operate on the exit-gate side by side with the foreign exchange regulations. In order to operationalize the proposed mechanism, an elaborate set of cardinal questions are devised that must be answered by the remitting state’s institutional network before out-remitting any chunk of foreign exchange—big or small. It follows that no institution of whatever weight, size or strength can answer all of the questions on its own on standalone basis; instead different questions would have to be answered by different institutions (and their underlying enforcement outfits) to achieve desired aggregate outcomes and impact. A suitable theoretical framework is laid out and expanded to develop the concept of rentier state elite who, with ingrained centrifugal economic propensities, constantly try to funnel foreign exchange out of the economy and park it in foreign jurisdictions. It is contended that the rentier state elite keep the foreign exchange policy regime porous and its enforcement outfits incapacitated so as to ensure selective and patchy application of various regulations particularly the foreign exchange rules and tax laws. The dynamic causal mechanisms are traced between the rentier state elite and the systemic aberrations, and are galvanized through empirically-based reasoning culminating into a case study. The tax nexus insufficiency established through critical survey of the tax system and its coupling with the foreign exchange regulations is brought out as the key take-home, which then connects back to Pakistan’s perennial BOP blues. The analytical framework developed, it is posited, is generalizable to other similarly-circumstanced national economies that are constantly facing BOP problems.
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82. BPM6 classifies Remittance of Royalty/ Franchise & Technical Fees as Current Account-Services-Royalty, Frachnise & Technical Fees.
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122. Assessment orders are framed far and few in select number of cases that get selected for audit.
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124. BPM6 classifies Travel as Current Account-Services-Travel.
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126. The tax nexus implies enforcement effect induced and produced through mutually reinforcing coordination and interdependence. No is indicative of no cross-referencing with regard to that particular out -remittance head (or sub - head); Mild implies some oblique mention; and Robust denotes reporting of the transaction by the remitting bank to the remitter’s tax office.
127. The Private Foreign Currency Accounts Scheme was launched vide SBP Circular No. 32, dated February 23, 1991. The substantive part of the Circular reads: 1. As Authorized Dealers are aware the Government of Pakistan have decided to permit Pakistani nationals resident in Pakistan also to open and maintain foreign currency accounts with the banks in Pakistan. The Authorized Dealers are, therefore, allowed to open such accounts. Such accounts may be fed by remittances received from abroad, travelers cheques, foreign currency notes, and foreign exchange generated by encashment of Foreign Exchange Bearer Certificates. No question will be asked about the source of acquisition of such foreign exchange. 2. Foreign exchange released from Pakistan for any purpose and foreign exchange representing sale proceeds of goods exported from Pakistan, earnings of the residents on account of services, earnings/profits of the overseas offices/branches of Pakistani firms/companies and banks etc. will not be eligible for credit to such accounts and the residents will continue to be subject to the existing legal requirement of surrender of such funds to an Authorized Dealer within the prescribed time limit. 3. These foreign currency accounts will be treated in the matters of exchange control in the same manner as the foreign currency accounts of non-residents.
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129. Preamble to Pakistan, The Foreign Currency Accounts (Protection) Ordinance, 2001, (Islamabad: Ministry of Finance, 2001).
130. Section 3 of ibid.
131. Zaidi, Panama Leaks: A Blessing in Disguise - Offshore Assets of Pakistani Citizens: 73.
132. The SRO No.1016(1)/79 dated October 17, 1979 entitled Repatriation of Foreign Exchange Holdings by Residents was rescinded vide SRO No. 984(1)/2003, dated October 11, 2003.
133. R. Faruqee, Strategic Reforms for Agricultural Growth in Pakistan (World Bank, 1999). 24.
134. The amnesty from probe into the sources of financing the accounts opened and maintained under the FCAS, 1991, was extended through insertion of Clause (6A) in Part IV of Second Schedule to the Income Tax Ordinance, 1979, vide S.R.O. 219(I)/91, dated March 16, 1991, which read: The provisions of section 13, Chapter XI, or Chapter XII shall not apply in respect of any amount of foreign exchange deposited in a private foreign currency account held with an authorised bank in Pakistan in accordance with the Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan. Subsequently, vide S.R.O. 1344(I)/99, dated December 16, 1999, a proviso thereof was added, which read: Provided that the exemption under this clause shall not be available in respect of any incremental deposits made on or after the 16th day of December, 1999 in such accounts held by a resident person or in respect of amounts deposited in accounts on or after the said date by such person.
135. Janjua, Pakistan's Liberalization of the External Sector, 147.
136. Ibid. JTRF (2020) 1–34 © Law Journals 2020. All Rights Reserved Page 33
137. F. Sturzenegger and J. Zettelmeyer, Debt Defaults and Lessons from a Decade of Crises (MIT Press, 2006). 134.
138. The amnesty was withdrawn vide S.R.O. No. 1344(I)/99, dated December 16, 1999.
139. Pakistan, The Foreign Currency Accounts (Protection) Ordinance, 2001.
140. Preamble to ———, The Protection of Economic Reforms Act, 1992, (Islamabad: M/O Finance, 1992).
141. Section 2(b) of ibid.
142. The laws that were specifically overridden were (a) the Foreign Exchange Regulations Act, 1947; (b) the Customs Act, 1969; and (c) the Income Tax Ordinance, 1979.
143. Section 3 of Pakistan, The Protection of Economic Reforms Act, 1992.
144. Section 4 of ibid.
145. Section 5(1) of ibid.
146. Section 5(2) of ibid.
147. Section 5(3) of ibid.
148. Section 10 of ibid.
149. ———, The Protection of Economic Reforms (Amendment) Ordinance, 1999, (Islamabad: Ministry of Finance, 1999).
150. The PERA, 1992 was amended through the Finance Act, 2018.
151. Ishrat Husain, Dollars, Debt and Deficits: Reform and Management of Pakistan's Economy (Karachi: Vanguard, 2004). 182.
152. Article 7(2) of OECD, OECD Model Tax Convention on Income and on Capital (Paris: OECD Publishing, 2017).
153. The British Government's Income Tax Ordinance, 1922, was adapted by Pakistan in 1947. The same nomenclature, however, continued to be in vogue.
154. Section 18(2B) of Pakistan, The Income Tax Act, 1922, (Karachi: CBR, 1947).
155. Section 18(2B) of ibid.
156. Section 18(3A) of ibid.
157. Section 18(3B) of ibid.
158. Section 50(3)(a) of ———, The Income Tax Ordinance, 1979, (Islamabad: CBR, 1979).
159. Section 3(d) of ibid.
160. Section 152 of ———, The Income Tax Ordinance, 2001.
161. Section 152(1) of ibid.
162. Section 152(1A) of ibid.
163. Section 152(1AA) of ibid.
164. 152(1AAA) of ibid.
165. Section 152(2) of ibid.
166. Such exclusions are listed in section 152(3)&(7) of ibid.
167. Section 152(5) of ibid.
168. Section 152(6) of ibid.
169. Section 152(5A) of ibid.
170. The data was supplied vide SBP's Letter No.DS.BP.39.01/2013, dated June 6, 2013.
171. Pakistan Revenue Automation Limited - the IT arm of the tax administration.
172. Note for the Minister for Finance entitled Introducing Online System of Issuance of Exemptions Certificates on Payments to Non-Residents - Approval Regarding, bearing F.No.3(61) Int. Taxes/2013, dated February 25, 2013. Finance Minister accorded approval to the proposal on February 26, 2013.
173. FBR's Circular No. 5 of 2013, dated June 28, 2013. [fbr.gov.pk/Orders/Income - Tax-Circulars/231]
174. FBRs' Circular No. 5 of 2013, dated June 28, 2013.
175. The data generated and supplied by PRAL in July, 2014.
176. The data for FY 2009 -13 was supplied by SBP vide No.DS.BP.39.01/2013/613, dated June 6, 2013.
177. Rule 43(b) of Pakistan, The Income Tax Rules (2002).
178. Linkdotin Telecom Ltd Vs Federation of Pakistan - Writ Petition No. 30164/2013, dated 20.12.2013.
179. Linkdotin Telecom Ltd Vs Federation of Pakistan - Writ Petition No. 30164/2013, dated 23.12.2013.
180. The five cases were (i) Federal Express; (ii) SWIFT; (iii) Sofia B.V .; (iv) Proctor & Gamble; & (v) WIS Telecom.
181. FBR's Clarification No.4(1)Int. Taxes- Ops/2013-114203-R, dated August 11, 2014, entitled Payment to Non-Residents - Exemption/Low Rate Certificate - Circular No. 5 of 2013 - Online Application by Recipient - Whether Pakistan’s BOP Blues: Demons in the Debit Side—An Elitist Analysis Muhammad Ashfaq Ahmed JTRF (2020) 1–34 © Law Journals 2020. All Rights Reserved Page 34 Recipient Can Apply for Exemption: Recipient Not Covered by Circular No. 5 of 2013 and Section 152.
182. Not unexpectedly, the Clarifications was also routed to President, Karachi Tax Bar Association, with reference to his letter No. KTBA/2014/638, dated March 3, 2014; as well as to Chartered Accounts (Big 4) firms (i) PWC; (ii) Deloitte; (iii) Ernst & Young; and (iv) KPMG with reference to their letter dated March 5, 2014. The fact that both the representations were a ditto copy of each other, and that those were filed simultaneously, gives interesting insights into how tax law fraternity operates in Pakistan to influence tax policy formulation.
183. Muhammad Ashfaq Ahmed, Pakistan's Governance Goliath: The Case of Non - Professional Chairman, F.B.R ., Pakistan Development Review 55, no. 4 (2016).
184. SBP's letter No.DS.BP.32.42/2014 -739, dated September 24, 2014.
185. SBP letter No.DS.BP.32.42/2014 -739, dated September 24, 2014.
186. Rule 43(b) of Pakistan, The Income Tax Rules .inserted vide SRO 255 dated April 12, 2017. Cite this Article Muhammad Ashfaq Ahmed . Pakistan’s BOP Blues: Demons in the Debit Side — An Elitist Analysis of the Outward Remittance Regime —Bringing the Tax Pincer Back I n. Journal of Taxation and Regulatory Framework. 2020; 3(1): 1–34p.
