C.B.R. & BANKS

C <!--[if gte mso 10]> C.B.R. & BANKS CAUGHT IN THE CONFLICT OF LAWS By Dr. Ikramul Haq, Advocate, Lahore "The International Monetary Fund (IMF) has imposed a condition on Pakistan's banking sector to provide complete identification of those individual depositors to Central Board of Revenue (CBR) who pay withholding tax on the interest of the amount deposited. Though, the IMF has apparently initiated this move to curb black economy, it might discourage individuals to keep their money in banks thus posing a serious threat to Pakistan's banking sector. Pakistan's banking sector will have to face a very severe blow in attracting more deposits after by following the action suggested by the IMF. The depositors may prefer different safer places around the world and the neighbouring countries such as Dubai in a bid to protect their money"---News item in daily The Nation, April 27, 2003. Reformation of tax system is the catchphrase for the Central Board of Revenue (CBR) these days, whether it is devising new policies or formulating rules under the delegated powers enjoyed by the apex Revenue Authority under section 237 of the Income Tax Ordinance, 2001 [hereinafter: "the new Ordinance"]. In the frenzy of bringing CHANGES on the dictates of foreign masters, without any meaningful direction, the CBR is imposing new obligations on withholding agents and taxpayers without first consulting them, taking their input and seeking their cooperation and consent. The banking sector has been specifically affected by the new Income Tax Rules, 2002, wherein they have been asked to divulge the names and particulars of their clients to whom they pay any profit on debt that is liable to deduction at source under section 151(1)(b) or (d) of the new Ordinance. This is in flagrant violation of the banking and other special laws that require bankers to keep confidentiality and fidelity of their account/deposit holders in normal banking dealings. The particulars and details of such account/deposit holders can only be revealed by banks under some special circumstances and that too on the fulfilment of certain legal formalities. The CBR has just promulgated Rule 52 under the new Income Tax Rules of 2002 and destroyed this special privilege available to bank clients from unnecessary disclosure of their names and addresses to tax authorities. This step by CBR on the dictates of the International Monetary Fund (IMF) will certainly have disastrous impact on the country's banking sector. Under the repealed income tax law, the banks were not required to identify individuals who were subjected to withholding tax on profit/interest. Previously the banks were depositing only the amount withheld @10% from depositors as tax without mentioning the names and other particulars of individuals. The IMF has ostensibly imposed this condition "in its main performance criteria which will in return encourage depositors for capital flights aimed at saving their amount in safe heavens of the world", disclosed by the Ministry of Finance to the English daily. It is not possible that the IMF people are ignorant about section 111(4) of the new Ordinance, which is an unprecedented tool for laundering black money under our tax regime. So the aim as propagated is not to discourage flight of capital but to destroy our banking system and its client base. The new law was written and promulgated under IMF's supervision and yet is being pretended as if there is nothing in it that provide for fight of capital and laundering of drug/untaxed/black money. The agenda of IMF [New East India Company in Pakistan], followed religiously by local gumashtas (Neo-colonial Pakistani agents representing civil-military bureaucrats and politicians] is clear i.e. to destroy our banking and industrial sectors in the name of good governance, transparency and performance criteria and open our markets for exploitation of foreign companies. I have been campaigning against the presumptive taxation of bank profits as it was helping the rich to avoid proper taxation and posing undue tax burden on people who were not earning any taxable income. The move to remove presumptive taxation from bank profits is a positive step, but to expose the banking clients in its garb is totally uncalled for. Tax deducted on bank deposits/accounts from tax year 2003 will be adjustable against the actual tax liability, so anybody who has taxable income will be required to file a return. Why should the banks disclose the names of their clients to the CBR? It is the duty of the CBR to detect persons who are not discharging their tax obligation and in respect of them they can contact banks, rather than forcing the banks to voluntarily disclose the name of all the clients. At present when the banks are offering the lowest possible yields on bank deposits such a move can further destroy their client base, which consequently will have negative effect for our investment and saving rates. Banks in Pakistan have already substantially reduced their interest on depositors' amount and now this move would also discourage bankers' clients to avoid depositing money in the country's banking channels. There is no problem for investors/businessmen to deposit their savings in different banks of Dubai, which are located at arm's' length. The taxpayers in Pakistan and quite familiar with harassment and intimidation tactics used by the CBR authorities to fill their own coffers rather than filling national kitty and the country's struggling economy requires initiatives in line with promoting investment friendly atmosphere in the country. Once the names and particulars of depositors are provided to them they are going to play havoc with them as now they enjoy legal powers to tax any unexplained investment in the year of discovery rather than to the year in which the money was invested [section 111 of the new Ordinance]. It is worthwhile to mention that in the repealed Income Tax Ordinance of 1979 [hereinafter: "the repealed Ordinance"] the principle of banking confidentiality was respected and only in special circumstances the Tax Department, when having in possession the exact title of any bank account, could seek details of such account from a bank on fulfilment of requirements of section 144(c) of the repealed Ordinance. The CBR in Para 8 of Circular No. 8 of 1991 observed, "The bank shall not e required to disclose the accounts and names of recipients on interest or profit. However, the banks shall continue to provide information under section 144 of the Income Tax Ordinance, 1979 in respect of particular bank accounts to which the Commissioner of Income Tax or the Central Board of Revenue gives permission to any of the Income Tax Authorities mentioned therein". This principle of banking confidentiality and protection of deposit/ account holders, unless there is some tax or criminal fraud or allegation of money laundering etc, has all along been respected everywhere in the world and its manifestation is available in laws relating to banking, corporate and taxes. It is disturbing to note that the CBR has violated this well established principle by the mere formation of a rule under delegated authority beyond the scope of Income Tax Law and in utter violation of fundamental rights guaranteed to the citizens by the Constitution of Pakistan of protection of law and freedom of business. The CBR while framing the new rule failed to remember that earlier, in its own Circular of 1991 (quoted above), it had expressed the correct position of law. Rule 54 framed in conjunction with section 151 of the new Ordinance is yet another bad move by the CBR as it is bound to have a negative impact on banking sector in particular and economy in general. Apparently, CBR does not want the businessmen to keep their transactions in the formal banking sector. In fact it has been forcing the people not to join the formal financial sector and remain part and parcel of the underground economy. On the one hand the CBR has made a rule under which the banks are required to disclose the name and complete particulars of. all the clients who receive any amount of profit and on the other it has allowed all the persons to launder their black money through fictitious foreign remittances (usually managed through local foreign exchange dealers by paying them untaxed local currency) through banking channels and no question are to be asked about the source of such deposits [CRR's letter No.F.4(34)ITP./2002 dated 2.9.2002]. IMF people certainly know about these instructions and they are just posing ignorant deliberately! The IMF-CBR mafia wants the names of small deposit holders of banks, but in the new 'Ordinance a special provision i.e. section 111(4) is inserted giving. a free hand to tax evaders, corrupt politicians, bureaucrats, drug barons and money launderers that no question would be asked if ' they remit their ill-gotten money from outside Pakistan through banking channels and surrender the foreign currency to the State and get Pakistani rupees as encashment. This is a bizarre situation that the corrupt and the powerful ate protected and small and genuine depositors are being penalized. The CBR., according to all available data and indicators, is the most inefficient, incompetent and corrupt arm of the Government. It has miserably failed to introduce any tax intelligent computerized system, despite the fact that it has a market-wage oriented company, PRAL, at its disposal, to monitor the economic activities of corporate/business sectors. This failure coupled with corrupt practices (according to some estimates, at least Rs. 300 billion go annually, into the pockets of corrupt tax officials) has contributed to generation of enormous black money in Pakistan. Now instead of tapping this black money and bring the big fish into the tax net, it has decided to destroy the very base of banking i.e. prudence and confidence between the banker and its client. The CBR in the name of expanding tax base has no right whatsoever to destroy the banks' client base. It should concentrate on electricity/telephone subscribers who pay thousands of rupees every month (interestingly most of the Government officials cannot justify how in their meager salary they can afford enormous utility bills), investors in real estate and luxury cars etc, builders and their buyers, and people having colossal wealth beyond their ostensible means [financial wizards, imposed on us by IMF and the World Bank having assets worth billions of rupees; got Wealth Tax abolished because on becoming resident in Pakistan their assets outside Pakistan became chargeable @ 50%]. The CBR is not interested to tax the rich and powerful in the land of the believers but wants the banks to disclose the names and other particulars of widows, pensioners and various small deposit holders, who are hardly making both ends meet, through their bank investments on which return has now become negligible. This is a great tragedy of .errors and shows the petty thinking that prevails in the CBR and officialdom sitting in the Ministry of Finance. The Banks are not legally allowed to disclose all. its record due to restrictions/bars imposed by section 33A the Banking Companies Ordinance, 1962, State Bank of Pakistan's regulations and sections 5 and 6 of the Bankers'' Books' Evidence Act, 1891. It is worthwhile to note that even the Code of Criminal Procedure, 1898 recognizes the overriding effect of Bankers' Books Evidence Act, 1891 vide proviso to section 94. This section says that for investigation of any crime under' sections 403,406,408 and 409 and sections 421 to 424 and sections 465, to 477-A of the Pakistan Penal Code, the bank cannot be forced to produce any document or other things unless a permission in writing of a Session Judge is produced. In all other cases, to force the Bank to produce books and documents, prior permission in writing of a High Court is required. The CBR cannot make any rule, policy or give any instruction to the banks which are contrary to one issued by the State Bank of Pakistan as provided in section 46B read with section 54A of the State Bank of Pakistan Act of 1956. Since' the SBP's instructions for maintaining secrecy of banks' clients, subject to law, have overriding effect, the rule framed by the CBR for disclosing the names and other particulars of the bank clients are against the special law and of no legal effect. The disclosure of names and particulars of account/deposit holders by banks to Tax Department is going to create a storm in the business and financial circles as well as unnecessary harassment for the small and medium investors. Probably the CBR has in mind that most of them will be unable to explain the source of their deposits and consequently they will get an enormous number of new taxpayers and of course loads of tax. This approach is erroneous. They should be given a chance to get money whitened as in the past such scheme were announced, and there is no need to destroy the existing investment/business activities through such ill-conceived measures in mind, especially when the rich and the mighty have been excluded from the, progressive taxation such as wealth tax. If a poor bank client is considered justifiably liable for penal action in respect of his investment, then why not the Finance Minister of the country should pay wealth tax on his total world assets? The result of such erratic policy will be massive withdrawals from the banks and shifting money to prize bonds (or, tijorees) and business transactions through fake TDRs/FDRs, hundis etc. There is no cavil about the fact that tax collection and culture cannot be improved without proper documentation, but first of all the stakeholders need to be educated and facilitated for the process of change and taken into confidence. The CBR stalwarts at the behest of their foreign masters want to do it undemocratically, unilaterally and ruthlessly that will result in further antagonism with the taxpayers and difficulties in implementing even well-meaning policies.