The Federal Board of Revenue (FBR) has outlined the income tax rates applicable to prize bonds and lottery winnings under the recently updated Income Tax Ordinance, 2001, for the fiscal year 2021/2022.
These changes, incorporated through the Finance Act, 2021, shed light on the taxation framework governing such windfalls and aim to streamline the deduction process for tax compliance.
Taxation Framework for Prize Bonds and Lottery Winnings:
The updated Income Tax Ordinance, 2001, provides clarity on the taxation of prize bonds and lottery winnings. According to Section 156 of the Ordinance, the following provisions apply:
(1) Tax Deduction on Prize Bonds and Lottery Winnings: Section 156(1) mandates that every person making payments for prize bonds or winnings from raffles, lotteries, quizzes, or promotions shall deduct tax from the gross amount paid. The applicable tax rate is specified in Division VI of Part III of the First Schedule.
(2) Tax on Non-Cash Prizes: If the prize is not in cash, Section 156(2) requires the person awarding the prize to collect tax on the fair market value of the prize. This provision ensures that the taxation framework covers both cash and non-cash prizes, aligning with the diverse nature of winnings.
(3) Finality of Tax Deduction: Section 156(3) declares that the tax deducted under sub-section (1) or collected under sub-section (2) shall be considered final tax on the income from prizes or winnings. This means that the deducted or collected tax is conclusive and eliminates the need for further taxation on the same income.
Tax Rates on Prize Bonds and Lottery Winnings:
(a) Prize on Prize Bonds or Crossword Puzzle: For winnings on prize bonds or crossword puzzles, the tax rate is set at 15% of the gross amount. However, if the recipient is not on the Active Taxpayers List (ATL), the rate increases to 30%. This provision encourages individuals to actively participate in tax compliance to benefit from the lower tax rate.
(b) Winnings from Raffles, Lotteries, Quizzes, or Promotions: Winnings from raffles, lotteries, quizzes, or promotions are subject to a tax rate of 20% on the gross amount paid. In case the recipient is not on the ATL, the tax rate escalates to 40%. Again, this reinforces the importance of being on the ATL for individuals receiving such winnings.
Significance of Section 156:
(1) Streamlining Tax Deduction: Section 156 streamlines the tax deduction process for prize bonds and lottery winnings, providing a clear framework for both the payers and recipients. This clarity contributes to a more efficient and transparent taxation system.
(2) Encouraging ATL Inclusion: The differentiation in tax rates based on ATL status incentivizes individuals to actively become part of the ATL. Being on the list not only brings tax benefits but also contributes to the broader objective of enhancing tax compliance.
(3) Fair Market Value Consideration: The inclusion of fair market value in the taxation of non-cash prizes ensures that the tax framework accommodates different types of winnings, maintaining equity in the treatment of various forms of awards.
(4) Final Tax Concept: The final tax concept simplifies the taxation process for recipients of prize bonds and lottery winnings. With the tax being final, there is no need for additional filings or assessments related to these particular sources of income.
Section 156 of the Income Tax Ordinance, 2001 establishes a comprehensive and clear taxation framework for prize bonds and lottery winnings. The specified tax rates, consideration of fair market value, and the final tax concept contribute to a robust system that encourages compliance and transparency in the taxation of windfall gains. Individuals involved in such transactions are advised to stay informed about these provisions to ensure accurate and timely tax deductions.
