In a move to incentivize the return of expatriates to Pakistan, Section 51 of the Income Tax Ordinance, 2001 has been highlighted by the Federal Board of Revenue (FBR).
The updated version of the ordinance, released up to June 30, 2021, incorporates amendments introduced through the Finance Act, 2021. Section 51 specifically addresses the tax treatment of foreign-source income for returning expatriates, offering a window of exemption for a specified period.
The text of Section 51 is as follows:
“51. Foreign-source income of returning expatriates.—(1) Any foreign-source income derived by a citizen of Pakistan in a tax year who was not a resident individual in any of the four tax years preceding the tax year in which the individual became a resident shall be exempt from tax under this Ordinance in the tax year in which the individual became a resident individual and in the following tax year.
(2) Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year, any income chargeable under the head “Salary” earned by him outside Pakistan during that year shall be exempt from tax under this Ordinance.”
The key features of Section 51 are as follows:
1. Exemption for Foreign-Source Income: Any foreign-source income earned by a citizen of Pakistan in a tax year, who was not a resident individual in any of the four tax years preceding the year in which the individual became a resident, shall be exempt from tax under the Income Tax Ordinance, 2001. This exemption is applicable in the tax year in which the individual becomes a resident and the subsequent tax year.
2. Conditions for Exemption: The exemption applies specifically to individuals who were non-residents in the four tax years preceding their return to Pakistan and subsequent residence. This provision is designed to encourage the return of expatriates by offering a tax incentive during the initial years of their return.
3. Exemption for Salary Earned Abroad: In the case of a citizen of Pakistan leaving the country during a tax year and remaining abroad for the entirety of that year, any income chargeable under the head “Salary” earned outside Pakistan during that year shall be exempt from tax under the Income Tax Ordinance, 2001.
The introduction of Section 51 recognizes the potential contribution of returning expatriates to the country’s economy. By providing a tax exemption for foreign-source income during the first two tax years of residency, the government aims to facilitate a smoother transition for individuals returning to Pakistan.
Understanding the provisions of Section 51 is crucial for returning expatriates, tax professionals, and businesses involved in the relocation and employment of expatriates. The FBR’s proactive approach in introducing such exemptions demonstrates a commitment to creating a favorable environment for expatriates considering returning to Pakistan, ultimately contributing to the country’s economic growth and development.
