Money Laun­der­ing

Enterprise - - Letters - Zahid Ali Khan, Karachi

There is ju­bi­la­tion in the stock mar­ket af­ter the Fi­nance Min­is­ter agreed to the pro­pos­als put for­ward by the SECP. In fact, the mar­ket had ral­lied al­most 10% ahead of the fi­nance min­is­ter ap­proval to the pro­pos­als, in­di­cat­ing clearly that in­sid­ers were aware that th­ese mea­sures will be ap­proved. So what are th­ese mea­sures about? 1. Source of in­come will not be asked till 2014 and af­ter 2014 th­ese funds will be treated as white money. 2. Cap­i­tal gains tax will be same at

10% till 2014. 3. NCCPL will di­rectly deduct CGT. 4. With­hold­ing tax on sale of shares will be abol­ished. The most in­ter­est­ing and con­tro­ver­sial clause is that no ques­tion will be asked re­gard­ing the source of funds for in­vest­ments in the stock mar­ket till 2014 and which will sub­se­quently be de­clared white af­ter 2014. This means that the tax au­thor­i­ties will not ques­tion any­one who in­vests in the stock mar­ket be­yond his iden­ti­fi­able source of in­come till 2014. Is the fi­nance min­is­ter try­ing to make the stock mar­ket a money laun­der­ing plat­form where the ill got­ten wealth could be chan­nel­ized and sub­se­quently de­clared as le­git­i­mate as­set of the in­di­vid­u­als? His­tor­i­cally, dur­ing the times of var­i­ous gov­ern­ments whiten­ing schemes were an­nounced but never be­fore to such an ex­tent.

One ob­vi­ous ben­e­fit is that this move could en­tice peo­ple to chan­nel their wealth away from the ar­eas which don’t get de­clared for the tax au­thor­i­ties. A distinc­tion should be made be­tween what is ill-got­ten wealth made through il­le­gal means and the wealth made on real busi­ness ac­tiv­i­ties with­out com­ing into in the ambit of tax. The lat­ter in­cludes ar­eas such as real es­tate, re­tail busi­nesses and whole sale dis­tri­bu­tion etc. Th­ese are the real busi­ness ac­tiv­i­ties peo­ple are en­gaged in with­out get­ting them­selves into the ambit of declar­ing their in­come. The wealth ac­cu­mu­lated through such busi­nesses nor­mally doesn’t get de­clared and thus peo­ple are able to avoid pay­ing taxes on their wealth. How­ever, at the same time, there are ways to make their wealth white by buy­ing prize bonds etc at a cost not ex­ceed­ing 10% of the wealth. So any­one wish­ing to make his wealth white has to pay 10% up­front, that’s it. It can be done when there is a need to do so as this win­dow is al­ways avail­able. Hence, th­ese peo­ple are not go­ing to start in­vest­ing in the stock mar­ket just be­cause of this an­nounce­ment. They will con­tinue to in­vest in their own ar­eas where they are mak­ing rea­son­able re­turns.

The peo­ple who could po­ten­tially start in­vest­ing money in the stock mar­ket, who are not in­volved in any real busi­ness ac­tiv­i­ties but park their in­vest­ment in var­i­ous in­for­mal busi­nesses, buy­ing of real es­tate or such busi­ness ar­eas where they are not re­quired to de­clare their source of fund­ing. Their orig­i­nal source of in­come is quite of­ten ill-got­ten wealth from du­bi­ous means. They can’t af­ford to bring out their wealth to the tax au­thor­i­ties as they don’t have the means to jus­tify its ori­gin from legal ac­tiv­i­ties. By declar­ing that the stock mar­ket in­vest­ment will not be ques­tioned is tan­ta­mount to open­ing an easy way to laun­der ill-got­ten money. Some­one has com­mented that the min­is­ter has cre­ated a win­dow for the present rul­ing elites of PPP to laun­der their money through the stock mar­ket which they have made while in of­fice. Th­ese are the ques­tions peo­ple will be ask­ing the min­is­ter as the gov­ern­ment is in the last year of its of­fice. There are se­ri­ous ac­cu­sa­tions of cor­rup­tion against this gov­ern­ment and there­fore it is quite rea­son­able that peo­ple will voice their con­cern about the in­ten­tion of this move at this stage.

Should FBR stop ask­ing about the source of in­come then there is no limit to what peo­ple can de­clare as their wealth but it’s not go­ing be like this. The mea­sures an­nounced on one hand in­tends to bring in money back into the stock mar­ket from ap­par­ently those who don’t want to de­clare their source of in­come and at the same time it wants to deduct cap­i­tal gains in the form of with­hold­ing tax through the Na­tional Clear­ing Com­pany (NCCPL). The mes­sage is… “Okay! You come to the stock mar­ket, we will not ask any ques­tion about the source of in­come but what­ever gains you make it will be li­able to pay cap­i­tal gains tax at source”. This ap­pears to be a good ar­range­ment on the sur­face but how this thing will work is rather dif­fi­cult to com­pre­hend at this stage. The way th­ese mea­sures have been pre­sented is as if the Pak­istani stock mar­ket is de­pen­dent on black money only. In any civ­i­lized so­ci­ety, there can’t be any is­sue with ask­ing the source of in­come/fund. Whether its stock mar­ket in­vest­ments, ini­ti­at­ing any busi­ness or build­ing a house; there is bound to be ques­tion about the source of in­come in most coun­tries. While an­nounc­ing th­ese mea­sures for stock in­vest­ments, one should ask the fi­nance min­is­ter why sin­gle out stock mar­ket in­vest­ments only, why not peo­ple should be ex­empted from declar­ing their source of fund­ing if some­one wants to start a busi­ness or for that mat­ter why not peo­ple who make their own home should be ex­empted from declar­ing the source of fund­ing.

Mea­sures like th­ese are not go­ing to bring in sus­tain­able in­flows into the stock mar­ket. In­stead of sim­pli­fy­ing the mat­ters, the au­thor­i­ties are in the process of mak­ing things more com­pli­cated and invit­ing sus­pi­cion that a door has been opened for whiten­ing the money. Cap­i­tal gains tax in it­self was an ill-timed move and no mat­ter how hard they try to en­force it, there is lit­tle the au­thor­i­ties should ex­pect to gen­er­ate out of this head. It’s never too late to re­con­sider the with­drawal of cap­i­tal gains tax till there is some op­por­tune time and the ground is ready for im­ple­men­ta­tion.

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