If not received through bank or cross cheque...: Income from relatives to be taxed

ISLAMABAD: The FBR will consider provision of gift from closed blood relations if received through cross cheque or banking channel otherwise it will be added in income chargeable to tax.

The FBR has also empowered Commissioners to freeze any domestic assets of a person involved in offshore tax evasion. About taxation on gift, under Section 39 of Income Tax Ordinance 2001 the FBR on Tuesday explained that if cash gift is received from relatives including grandparents, parents, spouse, brother, sister, son or a daughter but the same has not been received through cross-cheque or banking channel, the amount of gift will still be added in income chargeable to tax under the head "Income from other sources."

The Income Tax circular states that data analysis of Income Tax Returns filed in previous years shows that huge amount of non-recurring receipts from unrelated persons are transferred in the garb of gifts to avoid incidence of taxation.

In order to discourage this practice of undisclosed receipts, section 39 has been amended through the Finance Act, 2019 to include any amount or fair market value of any property received without consideration or received as a gift in income under the head "Income from other sources."

However, gift received from grandparents, parents, spouse, brother, sister, son or a daughter shall not be included in such income.

The new provision is subject to sub-section (3) of section 39 which states that an amount received by a person otherwise than by a cross-cheque drawn on a bank or through a banking channel from a person holding a National Tax Number shall be treated as income chargeable to tax under the head "Income from other sources".

This means that gift received by a person is chargeable to tax if gift is not received from grandparents, parents, spouse, brother, sister, son or a daughter of the recipient. However, even if cash gift is received from the relations mentioned above but the same has not been received through cross-cheque or banking channel, as the case may be, the amount of gift will still be added in income chargeable to tax under the head "Income from other sources,".

On offshore assets, the FBR empowered its Commissioners Inland Revenue to freeze any domestic asset of a person involved in offshore tax evasion and likely to leave Pakistan.

A new sub-section (5) has been added in section 145 as per which the Commissioner may freeze any domestic asset of a person where on the basis of information received from an offshore jurisdiction, the Commissioner has reason to believe that such person who is likely to leave Pakistan may be involved in offshore tax evasion or such person is about to dispose of any asset.

The Commissioner may freeze any domestic asset of the person including any asset beneficially owned by such person for a period of 120 days or till the finalization of proceedings including recovery proceedings and any other proceedings under the Ordinance, whichever is earlier.

Through the Finance Act, 2019, the term "offshore asset" has been defined by inserting a new clause (38AA) in section 2 which includes any movable or immovable asset held, any gain, profit or income derived, or any expenditure incurred outside Pakistan.

The term "offshore evader" has been defined by inserting a new clause (38AB) in section 2 and it means a person who owns, possesses, controls, or is the beneficial owner of an offshore asset and does not declare, or under declares or provides inaccurate particulars of such asset to the Commissioners. Penalty has also been provided in serial No.22 in sub-section (1) of section 182 that where an offshore tax evader is involved in offshore tax evasion in the course of any proceedings under this Ordinance before any income tax authority or the appellate tribunal, such person shall pay a penalty of Rs100000 or an amount equal to 200% of the tax sought to be evaded, whichever is higher.

Prosecution for concealment of an offshore asset has been provided by inserting a new section 192B according to which any person who fails to declare an offshore asset to the Commissioner or furnishes inaccurate particulars of an offshore asset and the revenue impact of such concealment orfurnishing of inaccurate particulars is ten million rupees or more shall commit an offence punishable on conviction with imprisonment up to three years or with a fine up to Rs500000 or both.

The term "offshore enabler" has been defined by inserting a new clause (38AC) in section 2 to include any person who enables, assists, or advises any person to plan, design, arrange or manage a transaction or declaration relating to an offshore asset, which has resulted or may result in tax evasion. Penalty has been provided in serial no. 23 of sub-section (1) of section 182 that where in the course of any transaction or declaration made by a person an enabler has enabled, guided, advised or managed any person to design, arrange or manage that transaction or declaration in such a manner which has resulted or may result in offshore tax evasion in the course of any proceedings under the Ordinance, such person shall pay a penalty of Rs300000 or an amount equal to 200% of the tax which was sought to be evaded, whichever is higher. Prosecution for enabling offshore tax evasion has been provided by inserting a new section 195B to the effect that any enabler who enables, guides or advises any person to design, arrange or manage a transaction or declaration in such a manner which results in offshore tax evasion, shall commit an offence punishable on conviction with imprisonment for a term not exceeding seven years or with a fine up to five million rupees or both.

The term "asset move" has been defined by inserting a new clause (5C) in section 2 and it means the transfer of an offshore asset to an unspecified jurisdiction by or on behalf of a person who owns, possesses, controls or is the beneficial owner of such offshore asset for the purpose of tax evasion. An unspecified jurisdiction means a jurisdiction which has not committed to automatically exchange information under the Common Reporting Standard with Pakistan. The term "specified jurisdiction" has been defined by inserting a new clause (60A) in section 2 and it means any jurisdiction which has committed to automatically exchange information under Common Reporting Standard with Pakistan. Penalty has also been provided in serial 24 of sub-section (1) of section 182 that any person who is involved in asset move from a specified to un-specified territory shall pay a penalty of Rs100000 or an amount equal to 100% of the tax, whichever is higher.

As per sub-section (1) of section 111, where any amount is credited in a person's books of accounts or a person has made any investment or is the owner of any money or has incurred expenditure or has concealed income and the person offers no explanation about such amount, investment, money, expenditure or income or the explanation is not satisfactory, such amount or the value of such investment, money, expenditure or income is added to the person's income chargeable to tax. However, the said provision is not applicable to any amount of foreign exchange which is not exceeding Rs10 million in a tax year remitted from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank and a certificate to this effect is produced from such bank.

Through the Finance Act, 2019, the limit of ten million has been reduced to Rs5 million in a tax year.