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Change in Income Tax Ordinance 2001 to Check Misuse of Remittances

ISLAMABAD (May 21 2006): The government is examining a proposal to amend the Income Tax Ordinance 2001 for checking the massive misuse of sending remittances through banking channels without disclosing source of investment.
<br> The scheme was being used by money launderers and fraudulent refund claimants for whitening black money. Tax experts said on Saturday that under the present taxation system black money could be easily whitened by taking shelter of section 111(4) of the Income Tax Ordinance 2001.

The law, demanding source of investment, “does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect”. Thus, the law does not allow the income tax officials to probe the source of remittances coming through legal banking channel.

Experts claimed that the scheme was originally designed to attract foreign investment through remittances. But, section 111 of the Ordinance has been widely misused by money launderers to hide the source of income.

They were of the view that the amendment was made in 2002, and organised gangs are misusing it for the last four years. The money was being transferred aboard through 'Hundi' and later brought back into Pakistan through normal banking channel to legalise it.

The department is not authorised to ask for the source of investment. The provision was basically meant for attracting investments. However, most of the investments were made in real estate and car financing sectors, which was unproductive in terms of economic growth. The modus operandi applied by such persons showed that money was transferred through currency dealers using banking channels for showing that they made a clean transactions whereas the fake exporters and money changers ganged up to transfer amounts not backed by actual exports or loans, gifts etc.

The moneychangers obtained proof of legal transactions through their agents or the agents of fake exporters abroad, to give cover to the illegally earned money or refund claims.

Experts claimed that the refunds on fake exports are not possible without the help of customs department and moneychangers for taking illegal advantage of section 111 (4).

Despite the ongoing misuse of the provision, the government remained mum during the last many years and applied no check on tracking investments made through such banking transactions, they opined.

Tax experts suggested that the government may consider one of the following options: Announcement of a time frame by which this scheme will come to an end, for example July 1, 2007; rules be devised as to which remittance would be exempt from scrutiny subject to evidence.

If this system is to remain in vogue, then as a transitional measure exemption be limited to funds invested in plant and machinery and productive business assets only.

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