The role of the banking sector is instrumental in ensuring the success of the tax amnesty scheme which has already generated considerable debate regarding its legality and the political motives behind its implementation towards the fag end of the PML-Nawaz government.

The scheme is aimed at ensuring at least partial repatriation of foreign assets of resident Pakistanis back home.

But bankers have their own reservations. Many senior bankers say the scheme has a strong element of ‘whitening’ of illicit money and fear that inflows of foreign liquid assets into bank accounts might create problems.

“We’ve burnt our fingers once. We know that handling of such transactions can be seen as an attempt to money laundering”, says an executive of Habib Bank Ltd.

Executives of other major banks also share this concern. Banks’ top managements, their legal teams and compliance officials all wonder whether it is enough for them to know that the transactions they are handling belong to those who have declared their foreign liquid assets under the tax amnesty scheme. Or, are they supposed to make sure that such transactions don’t fall into the category of attempted money laundering?

Some banks have sought clarification from the State Bank of Pakistan (SBP). On their part, central bankers say enforcing anti-money laundering rules and regulations are binding on all banks. And SBP, as a matter of routine, responds to all queries of banks and clarifies all ambiguities on a given issue.

“We’ve burnt our fingers once. We know that handling of such transactions can be seen as an attempt to money laundering”, says a Habib Bank Ltd executive

“Banks seek guidance on how to act prudently if there is any confusion regarding implementation of any government scheme but that ought not to be made an issue,” advises a senior central banker.

“Implementation of the tax amnesty scheme is in the hands of revenue authorities. The SBP will continue to discharge its responsibilities that also include monitoring of anti-money laundering regulations.”

Prime Minister Shahid Khaqan Abbasi unveiled the tax amnesty scheme in the first week of April and later on President Mamnoon Hussain issued the Foreign Assets (Declaration and Repatriation) Ordinance to give it legal effect.

Under the scheme, resident Pakistanis can declare their foreign assets at a flat rate of three per cent and foreign liquid assets at five per cent to skip legal action for holding assets so far undeclared.

A two per cent concessional rate is applicable on liquid foreign assets already repatriated back home but not declared in tax returns. And, a similar rate will apply on liquid assets repatriated and invested in government securities for up to five years or in the proposed dollar bonds.

This is the carrot part of the scheme. “The stick part of the scheme that you will see unfolding after the installation of the caretaker government will be something else,” says the head of a local bank. The Federal Board of Revenue (FBR) may start questioning sources of income of those availing this scheme to declare only part of their undeclared foreign assets.”

That is where implementation will become highly politicised ahead of the general elections. Bankers fear that banks handling transactions of those availing of the amnesty scheme will be dragged into ensuing legal battles.

The Banking sector had urged the government to exclude all resident Pakistanis from the cover of an existing law that gives immunity against questioning the sources of income of those depositing money in their foreign currency accounts.

But instead of fully meeting this demand, the government has decided that only income tax return filers will now be allowed to make cash deposits in their foreign currency accounts.

Inflows up to $100,000 per person per year in such accounts will continue to enjoy tax exemption and no questions will be asked from any agency about the sources of such inflows. However, the FBR can question the sources if the inflows exceed the above stated limit.

Those who have illicit money can misuse opaque statements in the law while conniving with tax officials. Misdeclaration and tempering of documents have hence become the hallmark of implementation of such schemes.

For banks therefore, executing such transactions may prove difficult owing to the paperwork involved because of the claims and counter-claims of the parties and because they have to stick to anti-money laundering regulations.

The fate of the amnesty scheme still hangs in the balance as it draws legal strength from a presidential ordinance, effective only till the first week of August.

Can we hope that a new elected government will be in place by that time as political commentators are talking about a possible delay in elections? Or, will the ordinance be re-promulgated after 120 days of its issuance (through a resolution of the Senate)?

More importantly, how will the scheme fare during the days of the caretakers and before the installation of a new political government? These are some of the points on which bankers are not clear and they don’t hide this helplessness during private interactions with the media.

“Do you think it will be a walk in the park for banks to implement a tax amnesty scheme in this environment of uncertainty?” asks a senior executive of one of the top five banks.

Generally speaking, though, the need for a tax amnesty scheme for bringing back home undeclared foreign assets of Pakistanis makes sense.

As on April 27, Pakistan’s foreign exchange reserves stood at $11.5 billion, up $593m over the previous week, thanks to a $1bn commercial loan received from a Chinese bank. End-June external debt servicing and routine outflows including those related to imports should continue to exert pressure on the reserves.

At the current level, SBP reserves are not even sufficient to cover two and a half months of imports and increasing this coverage to three months is quite essential.

Published in Dawn, The Business and Finance Weekly, May 7th, 2018

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