SRO on disclosure of untaxed money needs some clarification

Shamsul Huq Zahid

The strong speculation that the government might offer yet another opportunity to whiten black (undisclosed) money turned out to be true when the National Board of Revenue (NBR) issued a circular to this effect Monday.

But the opportunity, it seems, has the potential to cause worries, rather than comfort, among the holders of undisclosed money earned either through legal or illegal means.

The owners of black money amassed through illegal means are frustrated that they have been barred from availing themselves of the opportunity and warned of legal actions if they dare making any attempt to whiten their funds through the latest offer. Under the prevailing circumstances, they would have loved to pay punitive tax more than what has been fixed by the NBR in excess of normal rate of tax to get their money whitened.

The worries of the holders of legally earned yet undisclosed money could be of different nature. They might find the rate of tax, including the punitive one, offered under the new provision for declaring undisclosed money is too high. In most cases, the total tax rate for legalising undisclosed money would be between 25 to 30 per cent. The money that has not been disclosed to the taxmen could have come from legal sources such as savings, sale of land or house or other assets, consultancy or professional fees, profits from lawful business etc. The owners might find it quite painful to part with such a big chunk of their legally earned money in a one go.

Moreover, these people might find the tax rate offered under the opportunity quite unfair when the same NBR offered the facility for a number of years until fiscal 2005-06 to whiten any amount of black money by paying only 7.5 per cent tax. The provision for investing such money earned through fair or foul means in real estate and motor cars by paying only 10 per cent tax is still in vogue and is most likely to be discontinued from July 01, 2007.

The new NBR SRO might also put the taxpayers who have failed to disclose their legally earned money to the taxmen this fiscal or during last five fiscal years in a dilemma. On the one hand, they might find it quite difficult to reconcile to tax rate offered for legalising undisclosed money. On the other, avoidance of the offer might put them in even greater trouble in future.

Besides, there are a few undefined clauses in the SRO issued by the NBR. For instance, according to clause 3 of the SRO, the opportunity to disclose untaxed income will not be applicable to income or investment made through unscrupulous means. Here one question remains unanswered. How would the sources of undisclosed money be verified?

Another pertinent point for consideration is what will happen to those who did not disclose their undisclosed income or investment, though legally earned or made, before the time-frame -- the current fiscal and the previous five ones -- that was mentioned in the SRO. Will their related assets continue to remain undisclosed?

Besides, there exist some contradictions in the SRO. A case in point is the exclusion of the taxpayers, who have already been accused of tax evasion or will be found guilty of the same offence in future following investigations by appropriate authorities, from the facility of legalising regular yet undisclosed income. Here, there is one fear among those who will be disclosing their undeclared assets. Will they be later on, after such disclosure, be charged with earlier tax evasion? 

The government through the SRO, apparently, has tried to achieve twin objectives. Firstly, it expects to earn a sizeable amount of revenue out of the assumption that many would legalise their undisclosed money by paying the specified amount of tax. Secondly, the government hopes that the opportunity offered through the SRO would help the owners of such funds come clean and overcome fear of being chased by the taxmen.

But it may not be that easy to attain either of the objectives that are very much interlinked. The tax rate offered under the SRO to legalise undisclosed income might come as a major hurdle. The NBR needs to clarify the points, mentioned before, in order to remove some confusion surrounding the SRO. The removal of such confusion will be useful to help attain the twin objectives of the government.