ISLAMABAD: The Federal Board of Revenue (FBR), Monday, accepted the stance of the State Bank of Pakistan (SBP) on foreign remittances that amounts received through foreign currency account of Overseas Money Service Bureaus (MSB), Exchange Companies (ECs), and Money Transfer Operators (MTOs) fulfil all four conditions to avail exemption under Section 111(4) of the Income Tax Ordinance, 2001.
The FBR issued a circular number 5 of 2021 here on Monday. All circulars and instructions issued on the matter previously issued stand rescinded, the FBR added.
The FBR, Monday, directed all its field formations to withdraw all departmental appeals filed against the taxpayers on the issue of exemption available to foreign remittances and dispose of all cases of claim of foreign remittances under lenient interpretation of the section 111(4) of the Income Tax Ordinance, 2001.
The SBP vide memorandum dated May 7, 2021, held their ground and have responded to the FBR’s observations by stating that “to claim exemption under aforementioned clause of ITO, 2001, a taxpayer receiving home remittances” via MSB and ECs “strictly fulfils all the conditions set in section 111(4)(a) of the ITO, 2001.”
The SBP have also gone on to item-wise address the question of fulfilment or non-fulfilment of the four cardinal conditions laid down in the Income Tax Ordinance 2001, under the currently prevailing banking regulations and practices as under: (I) The FBR’s condition is that the amount should be in foreign exchange. The SBP response is that the home remittances amount is received from MSB/ECs in Pakistan in foreign exchange.
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(ii) The FBR’s condition is that the amount should be remitted from outside Pakistan through normal banking channel. The SBP response is that the foreign exchange is received by Pakistani banks in their nostro accounts through the normal banking channel from overseas jurisdictions.
(iii) The FBR’s condition is that the amount should be encashed by a scheduled bank. The SBP response is that the foreign exchange is surrendered (encashed) in interbank market and home remittances are paid in PKRs.
(iv) The FBR’s condition is that the certificate of encashment in respect of the amount should be produced by the concerned bank. The SBP response is that an encashment certificate is issued by bank that has received foreign exchange from abroad on behalf of the beneficiaries in the matter.
When contacted, a tax expert said that the FBR has explained in detail the exemption of home remittance up to Rs5 million in a tax year and its historical perspective. It is available, if comes through normal banking channel and encased in Pak rupees. The encashment should be obtained to claim exemption, he added.
According to the FBR’s directive to the field formations, the SBP having unequivocally responded to all four critical questions, that is, that foreign exchange ought to originate overseas, must reach and be surrendered to the SBP, and transaction should leave a banking trail behind, have been answered affirmatively.
Moreover, the SBP under the Foreign Exchange Regulations Act, 1947, is the institution to attend to all matters pertaining to, dealings in foreign exchange and securities and the import and export of currency. Therefore, the SBP, being 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 the benefit cover under tax laws. Foregoing in view, it is clarified that all cases of claim of foreign remittances be disposed of by according lenient interpretation to the conditions stipulated in section 111(4) of the ITO, 2001. Moreover, in order to win the trust of the taxpayers and spare the public resources for more productive use elsewhere, all Departmental appeals filed on the stricto sensu interpretation of the law, be withdrawn immediately, and no further appeals be filed if on all fours of this clarification.
Commercial remittances: SBP notifies revision in FE instructions
The board has received representations indicating that the letter of the (tax) law, SBP regulations, and the case law developed over time, stand at opposite poles when it comes to taxation or non-taxation of foreign remittances resulting in initiation of avoidable tax proceedings, creation of unsustainable tax demand and additional burden for taxpayers.
It is, therefore, imperative that a comprehensive set of instructions — laying bare historical context, de-conflicting policies and regulations of key institutional players, and prescribing a clear-cut roadmap for uniform implementation across the board with least additional compliance cost to the taxpayers, are issued.
The FBR said that a controversy has loomed for quite some time as innovations in banking, money transfer mechanisms, and development of newer products for cross-border transactions have outflanked the letter of the law as now Money Services Business (MSBs), Exchange Companies (ECs), and Money Transfer Operators (MTOs) perform almost identical to those of scheduled banks.
In some situations, the IRS field formations have refused concession vis-à-vis foreign remittances remitted via ECs, that is, Money Gram, Western Union and Ria France etc., relying on Appellate Tribunal Inland Revenue’s judgement.
It has been held that the afore-mentioned four conditions are mandatory to claim the benefit of foreign remittances under the ITO, 2001.
However, the SBP, while responding to the Federal Tax Ombudsman (FTO)’s memorandum has categorically taken the position that foreign exchange remitted into Pakistan via MSBs, ECs, and MTOs, such as, Western Union, Money Gram and Ria France etc, does constitute, “foreign exchange remitted through normal banking channel for all legal purposes”, the FBR added.
Copyright Business Recorder, 2021
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