FBR concedes tax exemption on remittances from three channels

ISLAMABAD: The Federal Board of Revenue (FBR) on Monday conceded income tax exemption on foreign remittances coming through three more channels including overseas money service bureaus (MSB), exchange companies (ECs) and money transfer operators (MTOs). By following the footsteps of the State Bank of Pakistan (SBP), now the FBR has declared that the exemption under section 111(4) of the Income Tax Ordinance 2001 would be available to the foreign remittances coming through three more channels including MSB), ECs and MTOs.

According to a detailed circular number 5, 2021, the FBR gave directions to the field formations that the SBP having unequivocally responded to 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for more productive use elsewhere, all departmental appeals filed on the stricto sensu interpretation of the law, be withdrawn immediately, and no further appeals be filed if on all fours of this clarification.

The FBR 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 MSBs, ECs, and MTOs perform almost identical to those of scheduled banks. The SBPs' aforementioned position legitimizing remittances via MSBs, ECs, and MTOs, and equating them with "scheduled banks" as laid down in section 111(4) of ITO, 2001, was challenged through a precise reference bearing C.No.1(1)TP/2017(A), dated March 31, 2021, mainly on four grounds. First, that all four conditions are to be concomitantly fulfilled and that, prima facie, "prefunded non-resident rupee account and the foreign currency account of MSB, ECs, MTOs etc, locally maintained with the Pakistani banks, and the subsequent replenishment through SWIFT cannot substitute the strict conditions of Section 111(4) of the ITO, 2001."

Second, as per section 2(m) of the SBP Act, 1956, a "scheduled bank" means a bank for the time being included in the list of banks maintained under sub-section (1) of section 37 of the SBP Act, 1956, and that MSBs, ECs and MTOs were not scheduled banks as per section 37(1) read with section 111(4) of the ITO, 2001. Third, the Supreme Court of Pakistan in case law titled as Army Welfare Sugar Mills Ltd. & Others vs. Federation of Pakistan reported and reported as 1992-SCMR- 1652 has laid down a couple of fundamental principles of claiming exemption, namely, that (a) the onus of proof is on the one who claims exemption, and (b) that "a provision relating to grant of tax exemption is to be construed strictly against the person asserting and in favour of the taxing officer." Fourth, it is for Supreme Court and High Courts to interpret law and not the regulators like SBP to do the same.