Banks Serving as Whistle-Blowers Under Reporting Requirements

Banks Serving as Whistle-Blowers Under Reporting Requirements

Banks in Pakistan are monumental avenues to observe the flow of existing finance and the reflection of the actual influx of finances in society. Whilst observing the boom of finances in society, banks serve as an effective apparatus to enable the levy of taxes in accordance with the enforced laws governing fiscal transactions and in turn lend a helping hand to allude potential tax evasion.

Over the past few years, tax evaders have come up with various mechanisms and measures to dodge an accurate assessment of wealth, income and tax levy. In the course of frequently facing such situations, the Federal Board of Revenue (FBR) and the Ministry of Finance have taken active steps in trying to curb such evasions by introducing sagacious provisions through the Finance Act, 2013 in the form of section 165A of the Income Tax Ordinance, 2001.

In light of the aforementioned amendment, banks are bound to keep an online record of all transactions, share all data related to such transactions and allow the Federal Board of Revenue online access to monitor incoming and outgoing finances. It had been observed, rather astutely by the Government of Pakistan, that online banking transactions would help the authorities in enhancing the economy and broadening the tax net. Furthermore, good use of the banking information had been intended to highlight white-collar crimes and money laundering offences. During the war against terror in Pakistan, it was also forethought that terrorist financing could be traced and prevented by banks through the use of information regarding online finance transactions.

As per the provisions of section 165A of the Income Tax Ordinance 2001, every banking company shall provide to the Board (FBR):

“a) online access to its central database containing details of its account holders and all transactions made in their accounts;

b) lists containing particulars of deposits aggregating rupees one million or more made during each of the preceding calendar month;

c) details of credit card transactions of One Hundred Thousand or more in a month;

d) list of loans written off exceeding rupees one million during a calendar year; and

e) copies of each currency transactions report and suspicious transactions report generated and submitted by it to the Financial Monitoring Unit under the Anti-Money Laundering Act, 2010 (VII of 2010).”

Additionally, in a landmark judgment which reflects a societal and judicial development regarding the tracking of financial transactions and cracking down on tax evasion, the honourable Lahore High Court, in the case of Soneri Bank Limited Vs. Federation of Pakistan and others 2015 P T D 1030 vide Writ Petition No.19821 of 2013, decided the vires of the aforementioned section and held that the information so collected was lawful and utilized by tax authorities in regulation of income tax.

In the above-mentioned case, it had also been contended that the requisition of necessary information from the banks by competent authorities was not a new thing. The concept had been introduced in the Anti Money Laundering Act 2010 as well as in the National Accountability Bureau Ordinance 1999 which obligated banks to provide information relating to account-holders.

As per the essence of section 176 of the Income Tax Ordinance 2001, banks are already sharing information about their account-holders with the Federal Board of Revenue in compliance of the concerned laws. Safeguards are sufficiently available in the ITO to maintain secrecy of record and details of taxpayers’ financial transactions which cannot be disclosed or shared with any third party except as provided by law. The sole purpose of all of this is to deal with tax evasion and concealment of taxable wealth and related information with iron hands.

The honourable Lahore High Court, while deciding the above-mentioned case, opined that the amendments fell within the vires of the Constitution. The relevant context from para 28 of the judgement is reproduced for reference:

“28. …. It clarifies that information regarding specific accounts maintained by persons, who do not possess national tax numbers and have not filed tax returns for the immediately preceding year is required to be provided to the Chairman or a Member of the Federal Board of Revenue or an officer authorized by the Chairman not below the rank of a Member of the Board. It appears that care has been taken in the rules not to create unnecessary burden on banking companies and to limit the extent and use of information sought and persons, who would have access to such information. Therefore, the apprehension of the petitioner that a Carte-blanche has been given to the Federal Board of Revenue relating to accounts of all depositors and the transactions made therein is obviously misplaced.”
– PTD 2015, 1030 (Lahore).

Amendments through the insertion of section 165A in the Income Tax Ordinance 2001 are pertinent to ensure a fair imposition/regulation of the levy of income tax, curb tax evasion and keep a track of all wealth through accessing information about fiscal transactions in the bank accounts of customers. These enactments also fall within the scope of Article 72(2)(a) and (g) of the Constitution of the Islamic Republic of Pakistan 1973.

Banks, while performing their functions related to transactions, have no right to cover up dubious financial transactions under the garb of secrecy and confidentiality. The amendments are part of the government’s focus on tracking the “undocumented” and “hidden” economy which is not contributing its due share of tax and is instead burdening the national exchequer which is not able to obtain sufficient funds.

Information on banking transactions can be used to monitor withholding agents, thereby regulating the collection of taxes through such mechanisms. The information can also be utilized to see whether persons to whom payments have been made have are correctly declaring their incomes.

Section 165A only appears to explain, facilitate and be utilized as an aid to interpret the original section rather than be a substantive section on its own, therefore, it falls within the purview of the language of Art.73(2)(a) and (g) of the Constitution rendering it intra vires to the Constitution.

For the implementation of section 165A, the Banking Companies Reporting Requirements Rules had also been issued on February 19, 2014. The concept of banking secrecy worldwide has been done away with in order to achieve the objective of curbing tax evasion, reducing burden on existing taxpayers and enabling all income earners to equally share the burden of tax where payable as per the law. Reporting measures would prove to be helpful in broadening the tax base and in turn helping the national exchequer in ensuring the availability of sufficient financial resources for human development and infrastructure.

Subsection (5) of section 165A of the Income Tax Ordinance 2001 clearly envisages that all information received under this section shall be used only for tax purposes and kept confidential. To protect the interests of the banking sector and their customers’ privacy, it has been ensured that such information shall be kept secret with certain built-in safeguards. Subsection (5) of the Income Tax Ordinance 2001 is reproduced below for reference:

“…(5) Subject to section 216, all information received under this section shall be used only for tax purposes and kept confidential.”

It has been conspicuously stated in section 165A that access to said information shall be exclusively available to the Chair and other members of FBR.

This amendment can be used against persons who have not filed their tax returns with the FBR and who routinely try to evade the levy of taxes.

Additionally, as an important step to keep a record of all financial transactions and in turn curb tax evasion, the FBR through its Statutory Regulatory Order (SRO) 115/1/2014 required every bank to submit to the Board a monthly deposit statement of account-holders who had deposited PKR 1 million or above in a month.

Pursuant to the amendment in law and the verdict of High Court, the purpose of the law appears to deal with tax evasion and the levy of accurate tax. Clarification from the Supreme Court can also be expected in this regard if the matter is taken up further or another SRO is issued by the FBR.

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References

Section 165A of Income Tax Ordinance, 2001;

SRO 115/ 2014

Article 70 of the Constitution of Islamic Republic Of Pakistan, 1973,

Soneri Bank Limited Vs. Federation of Pakistan and others, 2015 P T D 1030

 

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