There is, however, an important development that could create a room for one last scheme. This is related to the enactment of the Prohibition of the Benami Transactions Act, 2017. This law has profound implications for documentation of assets and economic transactions. The law surpasses all previous efforts aimed at documentation of the economy.
Before we point out why this law would create the need for one last chance and some transitory arrangements, it would be useful to state the key features of the Benami law and the implications flowing from its enactment.
Section-2(7) of the Act defines a "benami property" as any property which is the subject matter of benami transaction and also includes the proceeds from such property. The definition of a "benami transaction", on the other hand, given in Section-2(8), is somewhat complex and requires an analytical presentation.
The first component relates to transactions and arrangements whereby a property is transferred, or is held by a person, and the consideration for the property has been provided, or paid by, another person; and, the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration. The exception to this rule, are the cases of properties held in fiduciary capacity, such as a trustee, or within a family, through known sources of income.
The second component relates to transaction of a property carried out or made in a fictitious name. The third component relates to a transaction of a property where the real owner is not aware and denies knowledge of the transaction. The fourth is a transaction where the provider of the consideration is someone who is not traceable or is fictitious.
Furthermore, Section-2(9) defines a "benamidar" as a person or fictitious person in whose name the benami property is transferred or held, and includes a person who lends his name. Section-26 defines property in the broadest terms including both moveable and immovable assets, including monies held in bank accounts.
In this setting, Section-3 requires that no person shall enter into a benami transaction or hold a benami property. If any person enters into a benami transaction or holds a benami property, he would commit an offense that carries a punishment of rigorous imprisonment for a term which would not be less than one year but may extend up to seven years. The benami property would be confiscated in favor of the federal government.
An elaborate mechanism for identification of benami transactions and property has been laid out in the law that would allow due process of defense, appellate tribunals and appeals before the High Court, while special courts would be set up for trial of offenses under the Act.
Evidently, this is a comprehensive regime enacted to discourage concealment of assets by keeping them in the name of persons who are not their real owners. Admittedly, this has been a rampant practice in the country so much so that it was considered a norm and, in the absence of a law, not illegal. The law has now prohibited to enter into such transactions or to hold such properties. Furthermore, under Section-17 of the Act, all offices dealing with transactions and registration of properties including banking and financial institutions, stock and other exchanges, building authorities, police, tax authorities, civil armed forces etc. have been required to assist the authorities and tribunals, established under the Act, in discharge of their functions. Above all, once a benami property or transaction has been identified, and the holder is unable to prove his credentials of ownership, there is no scope of any bargain or reprieve of any kind. The property would have to be confiscated and the offender would face a minimum jail term of one year, extendable to seven years.
This is a watershed for removing informalities and undocumented businesses from our economic life. Coupled with the fast evolving anti-money laundering (AML) and countering financing for terrorism (CFT), this law is closing all avenues of evading taxation, laundering proceeds of crimes and facilitating terrorist financing. It is in our national interest that our societal economic relations are transparently documented with due protection of privacy.
The law would have implications both for the formal and informal sectors. In the formal sectors, businesses are maintaining different sets of accounts for tax and non-tax purposes. The informal sector, on the other hand, by definition, is operating below the radar of tax and other regulatory authorities. However, both of them are active users of the banking and financial sector. The new law has virtually eliminated the possibility of accessing the banking and financial system unless the transactions and properties involved are in full compliance with the provisions of the new law.
As much as the law has the potential to reform business practices, nothing could be achieved if it is not implemented effectively and sincerely. A significant improvement in FBR's capacity is required to discharge new responsibilities under the new law.. Curiously, the law remained ineffective for nearly two years as the rules were not framed. This has been done by the present government by promulgating the Rules in March 2019.
Viewed in the above background, this is momentous occasion that must be fully capitalized. But we must provide a transitory phase during which properties presently not compliant with the law should be allowed to be regularized. This is more importantly required by the informal sector, which is increasingly considered as a backbone of the economy. This sector should be facilitated to come out of the shadows of informal environment and become part of the mainstream. For this purpose, the government must design a more simplified scheme of taxation for such businesses and given them full self-assessment scheme and fewer audits, for example, in the first five years.
We recommend that this is the new environment that could be the basis for a new amnesty scheme, particularly from applicability of the new law, for those coming forward to declare assets and transactions which may constitute an offense under the law. The primary aim of the scheme should be regularization and not revenue. But given the precarious state of public finances, moderate rates of taxes should be imposed.
(The writer is former finance secretary)
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