Money-whitening schemes recommended

[LRE]

Money-whitening schemes recommended



Saturday, June 07, 2008
By Mehtab Haider

ISLAMABAD: A mid-term review of Medium Term Development Framework (MTDF), approved by the National Economic Council (NEC), has asked tax authorities to introduce traditional money-whitening schemes or new innovative methods for reducing the quantum of black economy.

The proportion of black economy has been on the rise in Pakistan since 2000-01, as it currently stood at 20.3 per cent against 16.5 per cent in 2000.

The Federal Board of Revenue (FBR) is currently preparing options for the government to introduce a new scheme in the budget for 2008-09, for converting the black economy into white through normal economic activities.

The mid-term review of MTDF (2008-2010), approved by an NEC meeting chaired by Prime Minister Syed Yousuf Raza Gilani recently, reveals that there was a fall of 51.6 per cent in GDP under the black economy since 1960.

This estimate declined to 31 per cent by 1965 and went down to 22.7 per cent by 1970. The size of black economy further shrank to 18.1 per cent by 1975. However, the size of black economy witnessed an increasing trend again and pushed up to 24 per cent by 1980. During the era of former military ruler Zia Ul Haq, the size of black economy again accelerated and touched the mark of 27 per cent by 1985.

During the 90s, when democratic regimes assumed the reigns of power, the size of black economy remained at 26.3 per cent and 26.2 per cent during 1990 and 1995 respectively.

Then it started showing a declining trend and touched the lowest mark of 16.5 per cent by 2000. But the trend of black economy has been increasing again in Pakistan, as it touched 20.3 per cent by the year 2003.

The mid term review of the MTDF said that higher tax rates could be one of the reasons for black economy, as higher tax rates motivate people to indulge in tax evasion practices, which is facilitated by the use of currency of higher denominations.

Dwelling upon the future strategy to cut down the size of black economy, the mid term review of the MTDF states that there is a need to introduce money whitening schemes, which would not only broaden the tax base, but also accelerate economic growth and generate more employment. It also stressed upon the tax authorities to keep tax rate low for reducing incentives of tax evasion.

The mid term review of the MTDF states that there is need of narrowing the average spread between the lending rates and deposit rates, by raising the deposit rate to a reasonable level. Higher interest rates encourage people to invest currency holdings in time and other forms of deposits, thereby reducing the volume of currency in circulations.

The future plan also envisaged to increase documentation, detection and hammering of tax evasion by equipping the tax administration.

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