Islamabad, July 31, 2023 – The Federal Board of Revenue (FBR) has recently released an updated tax law aimed at addressing the issue of black money and unexplained funds in Pakistan.
The FBR issued Income Tax Ordinance, 2001 updated up to June 30, 2023 incorporating tax amendments made through Finance Act, 2023.
The updated tax ordinance focuses on the treatment of undocumented money under Section 111 of the Income Tax Ordinance, 2001.
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Under the revised Section 111, the FBR outlines the guidelines for dealing with unexplained income, assets, expenditures, and income concealment.
The section states that if any amount is credited in a person’s books of account, if a person makes any investment or possesses money or valuable articles, or if any person incurs any expenditure without offering a satisfactory explanation about its nature and source, such amounts will be considered as income chargeable to tax under the head “Income from Other Sources” to the extent that they are inadequately explained.
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Moreover, if a taxpayer attempts to suppress any production, sales, or any amount chargeable to tax, or if they hide any item of receipt liable to tax, and the explanation provided is deemed unsatisfactory by the Commissioner, the undisclosed amounts will be included in the taxpayer’s income chargeable to tax under the head “Income from Business” to the extent that they remain unexplained.
However, the updated law also offers some provisions for taxpayers who can provide reasonable explanations for their financial activities. For instance, if a taxpayer can explain the nature and source of an amount credited or investment made as agricultural income, the explanation will be accepted to the extent of agricultural income tax paid under the relevant provincial law.
The FBR also clarifies the treatment of undisclosed foreign assets or expenditures. If such investments or expenditures are discovered by the Commissioner and are situated or incurred outside Pakistan or are considered foreign-source concealed income, they will be included in the taxpayer’s income chargeable to tax for the tax year immediately preceding the year in which they are discovered.
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Additionally, the law empowers the Commissioner to include the difference between the declared cost of an investment or valuable article and the reasonable cost, or the declared amount of expenditure and the reasonable amount, in the taxpayer’s income chargeable to tax under the head “Income from Other Sources.”
The FBR has set a threshold for the exemption of certain foreign exchange remittances. Any amount of foreign exchange remitted from outside Pakistan through normal banking channels, not exceeding five million Rupees in a tax year, and en-cashed into Rupees by a scheduled bank, will be exempted from the provisions of this section. This exemption also applies to remittances through money service bureaus, exchange companies, or money transfer operators.
Furthermore, the updated law states that if a taxpayer includes any income subject to final tax under the Ordinance while explaining the nature and source of any amount under sub-section (1), the taxpayer shall not be entitled to take credit for any amount that exceeds the imputable income, unless the excess amount is reasonably attributed to business activities subject to final tax, and the taxpayer submits audited financial statements and accounts by a chartered accountant.
To ensure smooth implementation, the FBR is empowered to create rules under Section 237 for the effective execution of this section.
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The FBR emphasizes that a separate notice under this section is not required to be issued if the explanation regarding the nature and sources of various financial transactions, such as amounts credited in a person’s books of account, investments made, ownership of money or valuable articles, funds used for expenditures, and suppression of any production, sales, or tax amounts, has already been confronted to the taxpayer through a notice under sub-section (9) of section 122 of the Ordinance.
The newly updated tax law aims to enhance transparency and accountability in financial matters, encourage compliance, and combat the issue of black money in Pakistan. Taxpayers are advised to fully understand the provisions outlined in Section 111 of the Income Tax Ordinance, 2001, and comply with the requirements to avoid potential penalties and legal consequences.
Disclaimer: The content of this report should not be considered as legal advice. For accurate and up-to-date information on tax laws or any other legal matters in Pakistan or any other country, please consult official government sources or seek professional advice from qualified legal experts or tax professionals.
