On stashed cash: State could impose 10% tax on remittances

ISLAMABAD: As authorities struggle to increase tax collection, the state is considering a proposal that could see a levy of 10% tax on profit made on foreign remittances placed in savings accounts.

The proposal comes as the government suspects that the amount sent through remittances could be black money being channelled into the country to evade taxes.

The authorities may also bring gold and silver imports into the tax ambit with its plan of charging 6% withholding tax at the import stage.

The proposals are part of the PML-N government’s elimination of concessionary tax regime plan that will be implemented from the next fiscal year 2016.

Under $6.7-billion International Monetary Fund bailout programme, the government is bound to phase out all the concessionary Statutory Regulatory Orders (SROs) within three years.

In the first phase, it has already withdrawn Rs103 billion worth of SROs. The next phase will be implemented from July this year and the Federal Board of Revenue (FBR) has worked out plans to withdraw more SROs worth up to Rs120 billion.

At present, the profit earned by depositing remittances proceeds in local banks is exempted from all taxes — including the 10% withholding tax that is charged on profit-generating bank accounts. The FBR has firmed up the proposal to withdraw this exemption along with almost a dozen more from next fiscal year, said sources in the tax machinery.

Remittances are one of the main sources of foreign earnings and successive governments have shown reluctance to charge taxes on remittances. The fear stems from the government’s reluctance to disturb the flow of dollars critical to balance external books so much so that it is reimbursing the transfer fee to encourage repatriates to send money through banking channels.

For the ongoing fiscal year, the government has estimated receiving $16.7 billion or Rs1.7 trillion on account of workers’ remittances. In the first nine months of this fiscal, the country received $13.3 billion remittances, according to the State Bank of Pakistan.

The FBR is of the view that the profit earned by placing funds in banks cannot be treated as foreign income and should be taxed. All foreign remittances are exempted from all kinds of taxes and are utilised to hide black money, explained a senior FBR official.

According to a former central banker, roughly 10% to 15% of the total remittances are not genuine cases and the channel is used as means to legalise ‘ill-gotten’ earnings. He said that these enormous amounts are subsequently invested in the stock market and the real estate sector.

The authorities argue that if the exemption continues, it will hinder efforts to curb the growing money laundering issue.

Citing the case of model Ayyan Ali, officials said it was not an isolated case of transferring unexplained income abroad. Ayyan was arrested by customs officials from Islamabad airport with $500,000 undeclared cash.

Officials said politicians and industrialists have been using these channels to transfer their ill-gotten money to Dubai and then use the remittances channel to bring it back.

Tax on gold

The FBR is also considering imposing withholding taxes at 6% on gold and silver at the import stage. At present, the imports of gold and silver have been exempted from taxes through an SRO by the ministry of commerce aimed at encouraging the export of the refined gold and silver products.

In another significant proposal, the government may also withdraw tax exemptions available to investment companies including National Investment Trust on distribution of profit among shareholders.

Last year, the government had withdrawn a similar blanket exemption available to mutual funds, limiting it to only those companies that distribute at least 90% of the profit in cash.

The FBR wants that entities like Sheikh Sultan Trust Karachi, provident funds, benevolent funds and other such investment funds should either distribute up to 90% of the profit in cash or pay the tax.