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Pakistan: Informal economy: guesstimates

Monday, 19 September 2011 11:08

Source: Dawn.com
By Parvaiz Ishfaq Rana

THE size of informal economy created by circular remittances through ‘Hundi’ and ‘Havala’ is guesstimated at Rs4.13 trillion with the liquid cash circulating in the market via the banking sector, according to the Federal Board of Revenue sources.

The FBR has reached this conclusion on the basis of Rs12 billion it collected as withholding tax at the rate of 0.3 per cent on cash withdrawals from commercial banks of over Rs25,000 during 2010. Such a huge cash withdrawal, it reckons, is used for money laundering and tax evasion.

The cash transactions yielding Rs12 billion as withholding tax comes to Rs4.13 trillion for 2010 and the withdrawals below Rs25,000, if included, could take the actual amount even higher. People wanting to whiten their black money withdraw cash from banks and transfer funds abroad through ‘Hundi and ‘Havala’ to be ultimately brought back into the country. These remittances find their way into foreign currency accounts of these banks.

Presently, the law is very lenient with foreign currency account holders and remittances received from aboard, as both are exempted from tax under Section 111(4) of the Income Tax Ordinance 2001. Under the law, tax hounds cannot raise any question or seek details pertaining to source of remittance, purpose, sender or beneficiary name, the FBR sources maintained.

Tax authorities have to simply rely on bank certificate for giving exemption on remittance or cash balance in foreign currency account.

Major beneficiaries of converting black money into white are importers and the investors in real estate. Importers generally indulge in under-invoicing of up to 30 per cent. Similarly, investors in property whiten funds after paying below the actual market price of a property. Generally property is registered at 60 to 80 per cent below the market price and this creates a huge sum of tax-evaded money for the buyer. Both need to convert black money into white.

By resorting to under-invoicing importers pay less duty and taxes generally up to 30 per cent of actual cost of an imported item, the FBR claimed. The law is so relaxed — importers fall under the final tax regime — and no tax or duties have to be paid thereafter.

The difference between actual price and under-invoicing is sent abroad through ‘Havala’ or ‘Hundi’ and remitted to tax-free and safe haven of foreign currency accounts. This also facilitate importers to pay the balance amount of under-invoiced price to foreign seller.

No wonder, rising remittances touched record $1.31 billion last month, up above 40 per cent over a year. The country received a record $11.2 billion in remittances or nearly six per cent of its GDP last fiscal year.

This has certainly helped to informally finance a substantial part of imports and in the build up of foreign currency reserves to a new high of $18 billion and has taken some pressure off the exchange rate despite stalled multilateral and bilateral assistance and escalating global oil prices. More important, it has provided space for sovereign decision-making.

Some say that the black economy is a blessing in disguise in the midst of political turmoil in Arab world and economic recession in the US and Europe.

Others maintain that if government allows such a huge parallel economy to go tax-free, the resource squeeze, so created, would force the government to resort to increased borrowings, resulting in higher inflation.