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Loan write-offs and tax losses

Colossal revenue losses have been caused to national exchequer by the Federal Board of Revenue (FBR) and National Accountability Bureau (NAB) by not taking action against the beneficiaries of politically-motivated and/or legally-manipulated loan write-offs. This inaction speaks volumes about incompetence and inefficiency of these two institutions. This calls for strict action by Public Accounts Committee and Supreme Court of Pakistan as both FBR and NAB ignored recommendations of three-member Commission, headed by former Justice Syed Jamshed Ali of Supreme Court in respect. This Commission was constituted to prepare a report in respect of recovery of written off loans from 1971 onwards in Suo Moto Case No 26 of 2007 and Human Rights Case Nos. 2698/06, 133, 778-P, 13933 and 14072-P of 2009.

The Commission submitted its report on February 20, 2013 (see details at http://thespokesman.pk/index.php/component/k2/item/1201-sc-opens-doors-to-jc-report-defaulters-since-1972-made-public). On the same date, the Supreme Court in it order said: “The report of the Commission to be made public, which is available for inspection according to the Rules to all and sundry”. The report exposed several “important figures” (details at http://nation.com.pk/business/25-Feb -2013/sbp-says-rs256b-commission-claims-rs87b-loans-waived-off-in-38-years). Strangely, none is punished under the law till today though the Commission recommended action against the beneficiaries that included such luminaries (sic) as the former President, former Prime Minister and his wife, leading politicians and businessmen.

One wonders why FBR and NAB have not conduct any investigation on the basis of Commission’s report even after a lapse of three years! The Commission’s report reveals that Rs 87 billion were written off in 38 years-Rs 2.38 billion between 1971 and 1991 and Rs 84.62 billion between 1992 and 2009. The report not only recommended action against those who got their loans written off but also against the bankers and the officials who helped in getting the loans waived off. Why NAB has not nabbed all of them. Why FBR has not recouped tax benefits derived by them. This is a question that must be taken up by the Public Accounts Committee of the Parliament.

The Commission gave the names of companies and directors who were beneficiaries of waivers of loans. The Commission suggested four steps: (i) principal amount should be recovered less payment already made, if any (ii) tribunals comprising on duty or retired judges of High Courts should be set up for the recovery of amounts (iii) legislation for the recovery of written off loans should be made and (iv) action should also be taken against the credit committees. As expected, the powerful vested interests successfully frustrated all the steps/actions proposed by the Commission. Till today, not a single rupee is recovered from any big fish. Even the apex court has not taken any follow-up action for the implementation of recommendations of the Commission and its verdict in a suo motu case No 26 of 2007 and human rights case Nos. 2698/06, 133, 778-P, 13933 and 14072-P of 2009.

FBR was duty-bound to take action against the beneficiaries of the loan-write offs under the law [Explanation to section 18(1)(d) of the Income Tax Ordinance, 2001] which provides that income under the head ‘Income from business’ includes “any benefit derived by way of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department’s Circular No 29 of 2002 or in any other scheme issued by the State Bank of Pakistan”. Most of the cases have got barred by time and no responsibility for loss of revenue is fixed by the FBR till today. The quantum of loss was highlighted in Politics of loan write-offs, Business Recorder, October 2010.

Banks, as a requirement of law, disclose details of loan write-offs exceeding Rs 500,000 in their annual accounts (available on their websites) yet FBR takes no action to recoup lost revenue! In the coming budget, income tax law should be amended to treat this “benefit” as separate block of income taxable at the rate of 50% plus recoupment of expenses claimed as “mark-up payable” but never paid.

During the self-claimed “transparent era” of Musharraf-Shaukat, the loan write-offs in just seven years (2000-2006) crossed the figure of Rs 125 billion, whereas in the much-publicised “corrupt eras” of elected governments (1985-1999) it was just Rs 30 billion. Huge amounts were written off during Shaukat Aziz era under Circular No 29/2002, issued by the State Bank of Pakistan (SBP) and major beneficiaries were politicians and industrialists. During the two previous tenures of Nawaz Sharif (1990 to 1993 and 1997 to 1999) total loans of Rs 22.35 billion were written-off in the first tenure Rs 2.39 billion and in the second Rs 19.96 billion. The written off loans during the two tenures of Nawaz Sharif constitute approximately 74.5 percent of the total of Rs 30.18 billion, written-off between 1986 and 1999. During the two tenures of late Benazir Bhutto, only Rs 7.23 billion were written-off, constituting 24.2 percent of the total written off loans-Rs 494.97 million in her first tenure and Rs 6.74 billion in the second term.

It is time to constitute a non-partisan committee of parliamentarians to determine tax losses occurring due to inefficiency of FBR and causes behind ever-increasing monstrous size of the underground economy. It is an incontrovertible fact that the loan beneficiaries became richer and none was declared insolvent. The government of the day instead of recovering amounts from them as directed by Supreme Court is busy appeasing the tax evaders through amnesties and immunities!! It is about time that the State give up its policies of appeasement towards plunderers of the national wealth and tax evaders. The foundations of corruption and rent-seeking activities of the State functionaries have to be destroyed with full force if democratic polity has to take roots and flourish.

The historical record shows that NAB has only been victimising political opponents of its mentor rather than cracking down on those who are engaged in plundering of national wealth, frauds and tax evasion with the connivance of unscrupulous elements in government institutions. People of Pakistan want to see NAB nabbing all such elements.

Why FBR is not taxing those who make enormous money by selling plots allotted to them at nominal rates in various civil and defence housing societies. They do not pay a single penny as tax [though selling plots meant for own use constitutes ‘adventure in the nature of trade’ and is chargeable to tax under section 18 read with section 2(10) of the Income Tax Ordinance, 2001]. How many in khaki and mufti, engaged in this profit-making, have paid any tax must be asked in the National Assembly and Senate. Till today not a single case of prosecution has been registered against any mighty figure who evaded tax through such disposal of plots showing lower than market value in sale deed and getting balance through “undisclosed” instruments. FBR officials are also responsible for colossal revenue loss to national exchequer for not taxing such transactions. Where is NAB? Why no case is registered against tax evaders and concerned FBR officials for this tax fraud and criminal culpability?

Huzaima Bukhari and Ikramul Haq, "Loan write-offs and tax losses," Business Recorder. 2016-03-18.
Keywords: Economics , Tax evasion , Human rights , Income Tax , Supreme court , loan-write off , Loan Beneficiaries , Politicians , Pakistan , FBR , NAB , SBP