Govt mulls lifting cap on remittances

Tola Associates estimates $20b annual inflows; PBC seeks tax relief to stem wealth exodus

ISLAMABAD:

The government is reviewing a proposal to allow people to bring unlimited dollars from abroad, subject to certification by the central bank about the source of money, as an advisory firm has estimated that Pakistan can get $20 billion annually by relaxing the current low limit.

A second option under consideration is that the government may relax the current Rs5 million 'no?questions?asked' limit on foreign currency. The Rs5 million limit was set many years ago and requires adjustment in light of weakening purchasing power, government sources told The Express Tribune.

To implement any of these options, the government will have to amend Section 111(4) of the Income Tax Ordinance, which deals with unexplained income. Under current law, the Federal Board of Revenue (FBR) cannot ask the source of income if foreign exchange remitted from outside Pakistan through normal banking channels does not exceed Rs5 million in a tax year, is encashed into rupees by a scheduled bank, and a certificate from such bank is produced to that effect.

The sources said the government is reviewing an option to remove the cap on the maximum limit of foreign currency that a person can bring in a year without disclosing the source. However, to address any issue regarding money laundering or unexplained income, the central bank will certify whether the sender and recipient were bona fide, they added. No final decision has been taken, and these options are still at an advanced stage of consideration.

The ministry of finance and the FBR did not respond to a request for comments.

A few years ago, the then government reduced the limit from Rs10 million to Rs5 million to minimise the chances of converting untaxed money into white money without disclosing the source of income. The Pakistan Democratice Movement (PDM) government had also proposed to replace "Rs5 million" with "$100,000" annual limit in the 2023 budget, but due to objection by the International Monetary Fund (IMF) it withdrew the amendment.

At the current rupee?dollar parity, Rs5 million is equal to $17,900, while $100,000 is equal to Rs28 million.

"Increasing the declaration threshold under Section 111 of the Income Tax Ordinance, 2001 to $100,000 may encourage repatriation of FATF?compliant overseas assets, potentially mobilising up to $20 billion in inflows," according to a Tola Associates budget proposal.

The firm underlined that while IMF frameworks support greater currency liberalisation, Pakistan already allows outward remittances of up to $100,000 per person annually. It said that rationalising the outbound flow limit could also conserve $1?2 billion in foreign exchange outflows.

The firm has also proposed that the government should encourage inflow of foreign remittances by offering a tax?free bonus of Rs10 per US dollar remitted through banking channels. This could increase formal remittances by an estimated $4?5 billion annually, according to the proposal.

Tola Associates' proposals are aimed at ensuring external sector viability without the IMF umbrella. Under a non?IMF scenario, Tola also sees the exchange rate appreciating to Rs250 to a dollar, provided the inflows materilise. Under the non-IMF scenario, inflation is projected to moderate to about 6%, while real GDP growth is expected to accelerate to 5% in the next fiscal year on the back of rupee appreciation.

The Pakistan Business Council (PBC), the leading advocacy body of Pakistani conglomerates, has also submitted its budget proposals to the government, demanding relief in various taxes.

It has proposed that the capital value tax on foreign assets should be either abolished or cut to 0.25%. The tax is levied on declared foreign assets on top of income tax already paid. By combining capital value tax with income tax on a $100 bank deposit at 4% interest, the total tax amounts to 60% of income, according to the PBC.

The PBC said that capital value tax is contested in the Supreme Court and is causing wealthy Pakistanis to surrender passports. It said that if retained at a reduced rate of 0.25%, the government should give a tax credit against the income tax.

The PBC has also demanded the restoration of the old tax residency criteria, as changes made in 2022 have discouraged people from staying in Pakistan. The then government made changes hoping to collect more taxes from Pakistanis who spend significant time abroad to avoid income tax. It increased the number of days for staying abroad to claim non?resident tax status. However, this did not help increase collection but instead forced rich people to review their nationality status.

The PBC noted that restoring the old law will reduce the incentive for Pakistanis to relocate abroad, which will help retain national wealth and improve Pakistan's foreign direct investment image.

The PBC has also demanded the elimination of the super tax or the specification of a defined timeline. The PBC said the super tax is discouraging reinvestment. The effective shareholder tax rate has now gone up to 68.1% because of the super tax, which actively discourages reinvestment and export?oriented growth, it added.

The PBC has also demanded the removal of the 9% surcharge on taxable salary income above Rs10 million. It said the highest tax bracket of 35% should also apply to income in excess of Rs120 million per annum. "Experienced professionals are moving abroad or to the informal sector," it added.