Black Money

21 Dec 2016

Once bitten, twice shy

I stumbled upon an opportunity to indulge in an in-depth conversation regarding black economy with a high customs official who told me that the existence of black money is equivalent to having a parallel economy that cushions the meager earnings of the financially marginalised classes of Pakistan, which he asserted is beneficial for Pakistanis. I was stunned by how he declared that black money had a pivotal role in Pakistan’s financial stability. Maybe he was trying to justify his own illicit income. At this point in time, it cannot be denied that Pakistan has colossal amounts of black money. A greater part of its economy isn’t on government records. There are several reasons for this. In order to understand these reasons, we need to address several questions pertaining to the issue in context of the Panama Leaks scandal. What is the historical background behind this problem? How exactly did the misguidance of the masses by some religious scholars and nefarious role of black sheep in Government revenue department aggravate it? How was black money converted to “white money” during the last few decades? Moreover, in the context of Panama gate, what is the significance of gift money given to a Pakistani by a foreigner?

In historical context, there are a number of reasons behind hoarding black money. At the heart of the problem is the sheer lack of public’s trust in its government. Lavish expenditure of taxpayers’ money for personal expenses by the ruling junta, politicians and bureaucracy alike, and misprioritisation of spending on part of the government (e.g. building flyovers instead of spending on health and education) have led to public disillusionment with government. Resultantly, people are hesitant when it comes to revealing their true resources and wealth. Moreover, in the past, the government took some unwise steps that hurt public’s faith in the government profoundly. For instance, the previous government of Mian Nawaz Sharif sealed all foreign accounts in 1998. This aggravated the problem to a significant degree. The businessmen are still scared even after so many years – once bitten, twice shy. Therefore, some wealthy people choose to maintain bank accounts abroad while others use various tactics to shield their money from government scrutiny, such as buying prize bonds or foreign currency and storing it in their homes or in bank lockers. Adding insult to the injury, revenue department officials have further widened the trust deficit between Government and the Public. Whenever an honest man has to confront the revenue department, they make sure to harass the life out of them. Consequently, the wealthy strata keep their money away from the government’s eyes. Furthermore, rather interestingly, a number of religious scholars have a role to play in the black money hoarding paradigm.

These religious scholars have issued many injunctions that discourage paying government taxes. They tacitly and sometimes explicitly profess that people should only pay Zakat instead of tax. In a country where religion is so deeply entrenched in the society, people tend to listen to Islamic scholars and hence, a large number of people prefer to pay Zakat instead of government taxes. While others who have to pay both because their finances are in the government record and, at the same time, they feel religiously obligated to pay zakat. Lastly, there are some who just consider themselves completely exempt from paying taxes after having paid Zakat, and they would do everything in their capacity to evade taxation, even if it involves bribing the government officials. It’s an irony that religious minded people indulge in sinful act of bribery in order to save themselves from “un-Islamic tax”.  Hence, all in all, the religious scholars have contributed towards creating a confused nation. As a result, the black money keeps on mounting up, tax deficit keeps on increasing as well; Islamic clergy men and revenue department officials keep on getting wealthier.

The predicament faced by the black money hoarders entails that they cannot invest their money in a legitimate business, which is under government scrutiny, because they know that they won’t be able to justify the source of their wealth when and if inquired by the government.  The government has, therefore, tried to come with various amnesty schemes in order to tap into the black economy resource of Pakistan, for several decades. An example of such scheme is amnesty through foreign remittance.  It has been a government policy that any person, who invested or bought something with the money that he, received from foreign sources as gift, will not be enquired about his source of income. As a result, the citizens with black money who wanted to make their money white would employ some money changers who would transfer their money to the foreign countries after charging certain commission. The foreigner on the receiving end would transfer the money back legally through a banking channel back to their account, thereby making Pakistani citizens’ wealth white (legitimate). According to the rules set by the government itself, it could not investigate any further into it.

There were three important ideologies behind this type of amnesty schemes. Firstly, the government wanted the maximum number of people to come under the tax radar and wanted them to do it voluntarily so that any public backlash can be avoided. Secondly, the Government wanted to encourage the foreigners and nonresident Pakistanis (NRPs) to invest in Pakistan by providing them with a convenient, hassle free and safe way. Thirdly, the government wanted to give the black money hoarders a chance to turn their money into legal money and consequently invest it back in their own country which would ultimately be beneficial for the country’s economy. Later on, the government would be able to tax these individuals, thereby broadening its tax base in the long run.

In context of the Pakistan’s amnesty schemes and Panama gate, it is now easier to understand the significance of gift money given to a Pakistani citizen by a foreigner. This “gift” parallels giving legal, though not ethical, immunity to the recipient from all charges of amassing black money. However, it must be noted that in the past decades, there had been hardly any businessmen in Pakistan who had not taken advantage of such amnesty schemes. Thus, the questions arises: how fair is it to think that the country where a colossal number of people are the hoarders of black money and  have utilised several “legal” amnesty schemes turn their black money it into white (legal) money, will not have its leaders taking advantage of same loop holes of the system? Is it even realistic to expect our rulers to behave or act differently?

Published in “Pakistan Today” on 21 December 2016

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