KARACHI, April 24: The government has agreed with the IMF to gradually curb “benami” practice, deep rooted in the local tradition, official sources said here on Thursday.
A Fund staff report reckons tax collection on income from financial assets and land seems considerably weakened by “benami” transactions. It says this practice also seems to hamper efficient enforcement of loan contracts, though refuted by commercial bankers.
Sources said that the government is now mulling over a strategy to contain the benami practice, without impairing the business confidence, so badly needed to boost domestic private investment.
Often a single person holds financial assets or land under different names, specially in the informal sector, through benami transactions. The IMF has urged the authorities to outlaw this practice.
Legal experts say that although benami transactions have no validity in law, it is a time-honoured practice, reluctantly recognized in courts in certain cases.
Sources here said the authorities have informed the Fund that the benami practice is very deep rooted in the local tradition and could only be gradually reformed.
In urban area, a single individual may own and hold a variety of assets including real estate, shares, fixed industrial assets and businesses in different names.
But commercial banks say that the IMF assumption that the ban on benami transactions would help enforce loan contracts is totally misplaced. Bankers assert that they do not face any loan repayment problem on this count as bank transactions are not only documented but are pursued with the “know your customer” practice and within the framework of prudential regulations.
The bankers are required to take identity cards, income-tax numbers etc., both for opening accounts and for extending loans in individual cases. Nothing is done without documentation. For processing of big loans, the balance sheet and the name of the directors is a must. The benami transactions are not uncommon in the informal sector but they do not impact adversely on banking business. As it is, the benami practice has been curbed by anti-money laundering measures. The sharp rise in exports and imports is explained as much by increased volumes as by correct documentation of the economy on account of international scrutiny of capital flows.
To escape the impact of the land reforms, the landed aristocracy got its individual holdings transferred under different names. But the IMF recommendation, some sources said, is meant to target the informal urban sector although the tax on farm incomes is meagre, with vast potential. Agriculture contributes about a quarter of the Gross Domestic Product. For raising tax revenue, the IMF is targeting trade and industry, that leads growth in the economy, says a businessman.
