FBR ends law controversy by allowing tax waivers on foreign remittances

ISLAMABAD: In a major move to facilitate overseas Pakistanis, the Federal Board of Revenue (FBR) on Monday dropped all its departmental appeals immediately filed over the last over seven years on the interpretation of law pertaining to availing of exemptions on foreign remittances.

The controversy erupted when the FBR’s Inland Revenue Service field formations refused concessions in some situation on foreign remittances sent via Money Services Business (MCBs), Money Transfer Operations (MTOs) and Exchange Companies (ECs)—like Money Gram, Western Union and Ria France etc.

After this decision, overseas Pakistanis now can avail tax benefit on foreign remittances sent through MTOs, ECs and MCBs besides scheduled banks.

This facility is over and above the government decision to launch from Oct 1 the National Remittance Loyalty Programme, which allows redemption in cash of reward points earned by the overseas Pakistanis for sending money back home through official channels.

Under the Income Tax Ordinance 2001, the government has mentioned four conditions for claiming of benefits on for foreign remittances — the remitted amount is in foreign exchange; it is sent into Pakistan through normal banking channels; it is encashed by a scheduled bank in rupees; and a certificate is produced to that effect from such bank.

A detailed Income Tax Circular no. 5 of 2021 was issued to resolve the issue and facilitate the overseas Pakistani.

In this background, the FBR has decided to dispose of all cases of claim of foreign remittances by according lenient interpretation to the conditions stipulated under section 111 (4) of the ITO 2001.

The board has announced to withdraw immediately all departmental appeals filed on the stricto sensu interpretation of the law in order to win the trust of overseas Pakistanis and spare the public resources for more productive use elsewhere.

The FBR has also barred field formations from filing further appeals on the same issue.

A judgment of IR Tribunal in 2013 held that all these four conditions are mandatory for availing the facility.

But contrary to this, the State Bank of Pakistan in response to Federal Tax Ombudsman in 2019 has categorically took the position that foreign exchange remitted into Pakistan via MCBs, ECs and MTOs does constitute foreign exchange remitted through normal banking channels for all legal purposes.

In March this year, the FBR challenged the SBP position of legitimising remittances via MCBs, ECs and MTOs and equating them with scheduled banks as laid down in section 111 (4) of the ITO 2001.

On May 7, 2021, the SBP responded to all four questions of the FBR and observed that a taxpayer receiving home remittances vis MCB and ECs strictly fulfills all the conditions of set section 111 (4) (a) of the ITO 2001.

It said under the Foreign Exchange Regulations Act 1947, the SBP is the institution to attend to all matters pertaining to dealings in foreign exchange and securities and the import and export of currency.

The SBP further said the central bank is the frontline regulator of all foreign exchange moving into or outside the country is in the best position to decide as to whether the necessary legal requirements have been met or not of a particular transaction to be able to avail of the benefits cover under tax laws.

Overseas Pakistanis remitted record $29.4 billion during 2020-21, helping the country meet its widening trade deficit.