Prime Minister Imran Khan admitted recently that the PTI government has not been able to conduct accountability in the desired and expected manner. This is tragic for Pakistan. Nevertheless, it was not unexpected due to reasons given in the following paragraphs. It is important for Pakistan as a sovereign state to understand that it is faced with state-sponsored legally protected modes of corruption. Politicians and media, without understanding the ground realities and the legal system, kindle hopes in simple people that there will be some sort of accountability of the corrupt and for obvious reasons these hopes do not materialize, creating hopelessness about prevalence of rule of law in the country. This has happened repeatedly since 1947 (we had EBDO way back in 1958) and recent examples are accountability drives undertaken by the then PML-N’s (Pakistan Muslim League-Nawaz’s) Senator Saifur Rehman against the PPP (Pakistan People’s Party), Gen Pervez Musharraf and Lt-Gen Amjad against politicians and businessmen at large in the 2000s and now by the PTI government against the parties that ruled the country in the past. The reasons for delay and failure require proper understanding of the prevalent financial and taxation system in the country that has been designed by vested interests in a manner that there can never be proper accountability against corruption. It is a web of mischief duly protected by strong-trip wires that sound alarms whenever there is an “intruder” in the system to correct the malfeasance.
Pakistan has not been well governed after 1948. However, it is the observation and belief of a common Pakistani that the rule by successive governments from 1970 to 2021 is full of corruption and those involved, irrespective of their political affiliations and status, are to be made accountable before the people. Organised and legally protected corruption accelerated after 1992. This is the reason why the PKR that had a one rupee margin against the Indian rupee in 1995 (Pakistan 32: India 31) is now 178 against 75 Indian.
Accountability of people involved in financial corruption is a very difficult and complex task. Throughout the world, the only law which can bring a white-collar criminal within the clutches of the law is the income tax law. The Chicago mobster, Al Capone, despite the best efforts under the well-established law of the US, could only be convicted under the income tax laws. The simple question by taxmen that is universally acceptable is the identification of sources of money used for maintaining standard of living. This is a universal principle that cannot be changed. Why this universal principle cannot be applied in Pakistan and what has been done in Pakistan that has made accountability almost impossible is narrated in the following paragraphs. The general view is that those who designed the taxation system in Pakistan after 1992 deliberately ensured elimination of this legitimate query to explain the source of income from our tax laws.
The result is that the national economy and social fabric have been utterly destroyed by way of ‘state-sponsored corruption’ through legislations in the areas of income tax and foreign exchange that allowed every illegality in the guise of legally permitted transactions.
The purpose of this article is not to create despair but to inform the public at large and those who do not fully understand the system, are made aware of the reasons why accountability is failing and why it is necessary not to raise false hopes. Our emphasis should be on correction for the future as almost all the wrong practices are in vogue. This is quite apparent from the tax directory of parliamentarians for 2019, the period of PTI government.
In the world today, if the rulers are corrupt and they want to avoid prosecution, the first thing they do is ensure destruction of taxation system. This has been done in Pakistan in a very discreet and organised manner and our people and also the courts could not distinguish the fine line between ‘simplicity’ in the taxation system and ‘non-documentation’. In the name of creating simplicity everything else in the system has been destroyed. There is no other example of this state-sponsored corruption in the world. This system has been intentionally designed to kill documentation and avoid the possibility of any question of ‘living beyond means’. To understand this system of state-sponsored corruption, we require a simple understanding of the following three laws enacted by the parliaments of Pakistan and validated wholeheartedly by the then judiciary of Pakistan. These laws were inherently wrong, purposely enacted against the common man and were the part of a joint venture of corrupt politicians against the people of Pakistan.
1. The first legislation is the introduction of the ‘Presumptive Tax Regime’ in the 1990s by the first Nawaz Sharif government. Under that law the universal principles of taxation of income were discarded. Under this system which is not applicable anywhere else in the world, a particular sum not being the ‘income’ was presumed to be the income and the amount of tax deducted at source was treated as final discharge of tax liability. What this meant is that an arbitrary percentage of turnover by way of withholding tax is treated as final discharge of income tax liability. A direct tax on actual income was thereby converted into an indirect tax. Pakistan may be the only country where direct tax has been abolished by an act of parliament. Through this system the link between ‘income’ and ‘tax liability’ was broken that rendered any inquiry about sources of income meaningless. For example, if Rs 6 on Rs 100 of value of goods imported by a trader, the state is not informed and concerned whether the trader has made Rs 50 as ‘profit’ on that transaction or has incurred a ‘loss’ of Rs 10 or whatever it is. Under this system there cannot be any identification of any source of income or assets created. For example, one can have assets worth billions and on inquiry one can easily say that this billion is the result of a business which is under presumptive tax regime or a gift from a son or a brother engaged in a business subject to presumptive tax. The best example is the export business of Pakistan worth USD over 25 billion. If the exporter has paid the withholding tax then no other question can be asked. In simple terms, the amount
paid as tax is the cost of laundering money if one wants to do so. The Institute of Chartered Accountants strongly resisted this law; however, it was unsuccessful. Subsequently, this matter was taken to the Supreme Court, but like any other case, such as the Moulvi Tamizuddin Khan case, the ‘law of necessity’ was applied and the honourable court in the case of the Elahi Cotton Mills Limited [1997 PTD 1555] validated this most absurd law in the history of taxation. As Chairman Federal Board of Revenue, through the Finance Act, 2019, the author tried his best to undo this aberration and numerous heads of income were taken out of the presumptive tax regime. But still some remained due to political expediencies. Nevertheless, in the intervening period the damage had been done and Pakistan as a country had no record of total income earned by its businesses from 1990 to 2019. This is in trillions of rupees. Through this scheme of presumptive taxation as final discharge of tax liability, money laundering became legal in Pakistan. The anti-money laundering laws are effectively toothless for funds so laundered under a presumptive tax system. Almost 80 to 90 percent of houses in DHA in Lahore do not appear from any explained source of income.
2. Our rulers were not satisfied with the legally available laundered corruption money in Pakistan. They devised a scheme for transferring funds outside the country in dollars. In order to do that the most notorious law in the history of foreign exchange laws of the world under the name ‘Protection of Economic Reform Act, 1992’ (PERA) was introduced. This law was a sequel to the scheme of Foreign Exchange Bearer Certificates (FEBCs) introduced Dr Mahbubul Haq during the Ziaul Haq government that allowed ‘no questions’ asked remittance of foreign currency abroad. This overarching law which placed all the foreign exchange regulations as contained in Foreign Exchange Regulations Act, 1947 virtually in the dust bin consisted of only one and a half pages. Our rulers were interested in simple and short laws. After the enactment of this law, two parallel foreign exchange regimes became operative in the country. In simple terms the foreign exchange laws during that time operated in a hilarious manner. For example if I wanted to send one million USD outside Pakistan for my genuine business or non-business purposes then it was virtually impossible to get a permission which is required under the Foreign Exchange Regulation Act, 1947. However, I can send ten million USD by purchasing the same from an exchange company by paying them in rupees under the PERA. Even that botheration was not required. The counters of exchange companies openly did ‘Hawala’ transactions for millions of dollars. This absurd law was duly protected by the judiciary in the famous case before a full bench of Lahore High Court in the matter of Hudabiya Engineering (Private) Limited reported as 1998 PTD 34. Then there was the Panama Leaks. After which this author wrote a book ‘Panama Leaks — Blessing in Disguise’. When these matters surfaced then in 2018 a partial correction was made in 2018 when the PERA was made subservient to general foreign exchange regulation. But the damage had been done.
3. A very strange and novel provision was introduced in the Income Tax laws by way of Section 111(4) of the Income Tax Ordinance, 2001. Under that provision, all money sent from abroad was made ‘immune’ from any inquiry about sources. They were declared and treated as if these were tax paid sums. However, after the Panama Leaks, a reasonable caveat has been placed in this section. Nevertheless, the result of this immunity between 1992 to 2021 was the availability of trillions of rupees in the national economy which were untaxed. This black, grey or white money whatever it may be called was again used to generate black money. The result is that at present around 40% of GDP consists of undocumented sector. If the government is serious about accountability then it should ask all Pakistanis to voluntarily disclose how much money they have laundered/sent through the application of Section 111(4) of the Ordinance. It is simple accountability which does not require NAB (National Accountability Bureau) or FIA (Federal Investigation Agency). It requires political and state will.
For those who are not familiar with principles of income taxation and foreign exchange laws of the country, the devastation caused to documentation within the national economy by ‘Presumptive Tax’ is illustrated through an example as under:
In an article printed in this paperback in 2018, the author described these three provisions as an ‘Unholy Triangle’ for legally permitted corruption which reduces accountability into a farce in this country. Now, when one sees the cases under investigation in NAB we find that in most of the cases they reflect funds received from abroad in the name of ‘benami’ persons such as peons and chowkidars, etc. This is Step 3 in the illustration. The problem that will arise when these cases will mature will be that prior to 2018 that benami transactions were legally permissible in Pakistan. It was only in 2018 that these were made illegal. The fundamental question from a legal viewpoint that will arise whilst investigating these cases will be the charge against the recipient if he or she claims to be a benami.
It is important to note that those who committed corruption during 1992 to 2018 were fully aware of the consequences that may arise after they were not in power. They foresaw the future and legally protected themselves in a manner that no accountability can be carried out against them.Syed Shabbar Zaidi, "Why the ideal of accountability always remains elusive?," Business Recorder. 2022-01-19.
Keywords: Economics , Economic conditions , Sales tax , Stat Bank , Federal budget , Economic policy , IMF , GDP , CPI , SBP