Karachi, October 1, 2024 – The Federal Board of Revenue (FBR) has extended its tax treatment regulations concerning unexplained income and assets for the fiscal year 2024-25, under Section 111 of the Income Tax Ordinance, 2001.
This section outlines how the government will tax any income or assets that remain unexplained by individuals or entities, providing a comprehensive framework for the declaration and taxation of such assets.
According to the FBR, Section 111 covers various scenarios where unexplained income or assets may arise. This includes any amount credited in a person’s financial records, investments, ownership of money or valuable articles, incurring of expenses, or any concealed income. The section also addresses inaccuracies in declared income, including the suppression of production, sales, or receipts that are taxable in whole or in part.
The FBR emphasizes that if a person fails to provide a satisfactory explanation regarding the origin of such income or assets, or if the explanation is deemed insufficient by the Commissioner, the amount in question will be included in the taxpayer’s chargeable income. Specifically, the amount will fall under the “Income from Other Sources” category if not adequately explained, while suppressed income or sales will be categorized as “Income from Business.”
Key Provisions of Section 111
1. Unexplained Income: If a taxpayer cannot explain the source of any amount credited to their accounts, the value of investments, or funds used for expenditures, these will be included in their taxable income under the head of “Income from Other Sources.”
2. Suppressed Production or Sales: If the taxpayer suppresses production, sales, or any amount chargeable to tax, the unreported income will be included under “Income from Business.”
3. Agricultural Income: The FBR provides an exception for agricultural income. If a taxpayer explains the source of unexplained assets or expenditures by way of agricultural income, such explanations will be accepted to the extent that agricultural tax has been paid under relevant provincial laws.
4. Foreign Assets and Income: Unexplained income from foreign sources is also covered under Section 111. If a taxpayer has foreign assets or concealed foreign-source income, it will be taxed in the year the Commissioner discovers it, even if the income or assets were acquired in a previous tax year. This ensures that foreign income cannot escape taxation merely because it was acquired before the tax year in which it was discovered.
5. Year of Discovery: The “year of discovery” of foreign assets or concealed income is defined as the year in which the Commissioner issues a notice requiring the taxpayer to explain the nature and source of those foreign assets.
Taxation of Unexplained Investments
The FBR further clarified that if the declared cost of any investment, valuable article, or expenditure is less than the reasonable market value, the Commissioner has the authority to include the difference in the taxpayer’s taxable income under “Income from Other Sources.” This regulation ensures that individuals or businesses cannot undervalue assets to avoid higher taxes.
Exemptions and Clarifications
Foreign exchange remittances up to Rs. 5 million that are brought into Pakistan through formal banking channels will not be subject to taxation under Section 111. Remittances received through money transfer services or exchange companies are also considered legitimate foreign exchange transactions.
Furthermore, the FBR has stipulated that taxpayers who rely on final tax sources to explain any amounts must furnish audited financial statements to justify any excess income that may be attributable to business activities. This prevents misuse of final tax provisions as a cover for undeclared income.
Compliance and Reporting
To ensure robust compliance, the FBR has stated that a separate notice is not required for cases falling under Section 111 if the taxpayer has already been confronted through a notice issued under Section 122(9) of the Income Tax Ordinance, which pertains to amendments in assessments.
The FBR’s continued enforcement of Section 111 highlights its focus on cracking down on undeclared wealth and hidden assets, both domestically and internationally. Taxpayers are urged to maintain transparent financial records and provide satisfactory explanations for any unexplained income or assets to avoid penalties and additional taxes.
This extension of the tax treatment for the 2024-25 fiscal year demonstrates the FBR’s commitment to ensuring that all income, whether local or foreign, is adequately accounted for and taxed according to the law.
