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Tax immunity on FCAs, FEBCs to continue

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Government turns down IMF demand of quashing money whitening scheme

Aug 30 - Sep 05, 1999

The government has turned down the proposal moved by the IMF for quashing the money whitening schemes such as FEBCs or Foreign Currency Accounts carrying the tax immunity.

The IMF had asked the government to abolish the tax amnesty to dollar bonds issued against the frozen foreign currency accounts. The IMF and the Central Board of Revenue (CBR) both discussed the issue and were in agreement that the withdrawal of tax immunity would help meeting the tax collection target.

Infact it was the brainchild of Dr.Mehbubul Haq, the former minister for finance, to offer tax immunity on FEBCs and FCAs. There were two primary objectives of that scheme: firstly to bring documentation into informal economy and secondly to stabilize forex reserves.

The Foreign Currency Accounts (FCAs) scheme no doubt proved the best seller and attracted as much as $11 billion upto May 28, 1998 when Pakistan had to go for nuclear tests. The government at this stage pronounced a state of emergency and the foreign currency accounts were frozen to avoid possible onslaught for panic withdrawals. The step for freezing of the FCAs was also taken because different governments in the past had already consumed the foreign currency deposits to meet trade deficits and to meet other obligations.

The freezing of FCAs was also a precautionary measure in the wake of international sanctions which had seriously affected the cash flow situation from external resources. Consequently, the home remittances were also registered a steep decline because the confidence of the depositors was hurt due to shift in the financial policies.

In order to restore the confidence of the depositors in the financial sector, various financial reforms have been announced and the things have started to improve, yet a great deal of efforts is still required to put the financial sector back on the right track.

The financial experts feel that by rejecting the idea of IMF to do away with tax immunity on the financial schemes, the government has done a wise decision in the present circumstances. While disagreeing the proposal, the government has said that dollar bonds were issued against frozen FCAs which enjoyed tax exemption and the government cannot again shake the confidence of the investors by withdrawing amnesty to bonds.

The IMF was opposing the money whitening schemes for the past many years because of their bearer nature and their continuation for a very long time. There should be a limit and the presence of money whitener products have proliferated tax evasion in Pakistan. The lenders demand that Pakistan should have improved tax to GDP ratio and also increase revenue collection in absolute number of rupees to overcome budget deficit. In the back drop of this situation the IMF again raised this issue during recent talks with the government.


The IMF and the Central Board of Revenue (CBR) who reached an agreement in a recently held meeting were in agreement for abolition of the money whitening schemes with the aim to augment revenue receipts. CBR has assured the IMF about the collection of tax revenues amounting to Rs356-360 billion during the current fiscal.

The area-wise break up of the total revenue collection includes that a target of Rs67-70 billion, Sales Tax Rs Rs85-90 billion, Income Tax Rs120-125 billion, Central Excise Duty Rs72-75 billion. (The total collection of revenues during 1998-99 was Rs309). Under the agreement the revenue collection in the first quarter of the current fiscal, July-September Rs55 billion, Second Quarter October-December Rs80 billion, Third Quarter Jan-March Rs105 billion and Fourth Quarter April-June Rs120 billion. There is a possibility of an additional collection of about Rs50 billion during the current financial year.

Agreeing with the IMF point of view, the CBR also feels that FCAs and FEBCs and other schemes where the government has allowed tax immunity were causing distortion in the implementation of the self assessment schemes. Opposing the tax immunity given under various schemes, CBR feels that immunity was making the self-assessment schemes ineffective in meeting the revenue collection targets.

The government was, however, not issuing any more foreign exchange bearer certificates (since June 30, 1999 )and that the tax exemption to the already issued FEBCs and FCAs would not be withdrawn.

The bearer nature of the FEBCs has the major attraction for the people out of the tax net. These products are also not inquisitive about the source of the money.

This immunity seems good for forex stability, yet there should be a limit of tax immunity for any scheme either for five years or ten years. There is also a need of launching sophisticated efforts to trigger the passion of the people to share their resources with others by putting them into formal and documented economy.