Currency Exchange Between Friends Similar To Hawala/Hundi

[Umer]

There is nothing wrong with this transaction. What is prohibited in Pakistan are ‘Hawala or Hundi Transactions‘ where foreign currency which was meant for Pakistan does not reach Pakistan througn official banking channels, rather it gets disrupted through Hawala/Hundi. In this scenario, foreign currency was never meant to be sent to Pakistan to begin with, and secondly the transaction is taking place through official banking channels where proper international bank accounts are kept by both the parties.

[Muhammad Wasif]

I got your point but just for further clarification I have those dollars in my international account and I have to transfer them to my Pakistani bank account to use them in Pakistan. Now is there any problem in this transaction? Some people in Pakistan say its money laundering because when income comes through International Bank to Pakistani bank Govt gets a tax and I am bypassing this procedure. I personally don’t think there is anything wrong in it but when I hear about such things I get confused that’s why I am asking for guidance.

[Umer]

This is not how taxation works.

Goverment does not tax the money sent from abroad right away, rather there are certain charges being deducted by the bank/intermediary involved in the process whenever foreign currency is sent to Pakistan and the Government gets foreign reserves equivalent to the amount being sent (this is why Hawala is illegal because then the Goverment loses foreign exchange reserves).

The taxation works on a different principle depending on whether a person is a resident or a non-resident.

For a resident, both pakistani source income and foreign source income are subject to tax; and for a non-resident, only pakistani source income is subject to tax. This stage comes later at the time of filing of the income tax return, not at the time when money is being sent from abroad. Furthermore, if a person has already paid tax in the country of foreign source income, then he is not required to pay double tax in Pakistan after showing proof of documentation (with countries where double taxation agreements are signed by Pakistan).

Secondly, this is not money laundering, money laundering involves a covert scheme where black money (money earned through illegal means) is mixed with white money so that the black money also appears white and legal.