According to the FBR brief on gift arrangements to the Senate Standing Committee on Finance, tax evasion is also a predicate offence under the Anti Money Laundering Act 2010 vide SRO No. 425/2016 of federal government, dated 14.5.2016. If tax-evaded income is passed on to someone (a close family member or an associate) under the garb of a gift to make it seem legitimate, it will also be construed as money laundering under the AML Act 2010 as an attempt to whiten untaxed income, and proceedings under the AML Act 2010 may ensure in such cases.
As per Income Tax Ordinance, 2001 there is no tax implication over genuine cash gift received or given to anyone. However, capital gain tax on gift in certain situations is levied in respect of non-cash assets. Directorate General Intelligence & Investigation has made certain investigations on the genuineness of cash gifts received during tax year 2016, the FBR said. From legal point of view, the following points are to be considered for the treatment of gifts for tax purposes:
Firstly, the gift should come from explainable source of income of the donor and the source of gift should be explainable vis-à-vis provisions of Income Tax Ordinance, 2001. Secondly, the outflow (donation) of gift is declared in the Wealth Statement of donor for reconciliation of assets. This outflow should correspond with equal amount of inflow of gift, declared in the donee's wealth statement.
Thirdly, the gift must be received through a crossed cheque through banking channel, as per section 39(3) of the ITO 2001. If otherwise, the gift shall be treated as income of the recipient in that tax year. Fourthly, if the taxpayer is unable to explain the source or details of donor of gift, it shall be construed as concealed income of the recipient for that tax year. Fifthly, if the donor of the gift has no declared sources from which that gift could possibly be donated, it shall be construed as concealed income of the recipient for that tax year.
The FBR said that the data gathered by the Directorate General reveals that over 2,700 individuals declared receipt of gifts in their wealth statements, aggregating over Rs 100 billion in tax year 2016 only. Eight individuals declared gifts varying in worth between Rs 500 million to Rs 1 billion, 49 individuals declared gifts worth between Rs 200 million to Rs 500 million. Likewise 97 individuals declared having received gifts varying between Rs 100 million to Rs 200 million. Two hundred and eight (280) individuals declared gifts between Rs 50 million to Rs 100 million. The number of individuals who reported gifts between Rs 10 million to Rs 50 million was 2,348. The seven regional directorates of the Directorate General Intelligence & Investigation have been directed to examine the cases involving huge amount of gifts which are not genuine. Currently, data relating to only one tax year (2016) has been taken up by I&I-IR for examination. In the meanwhile, regional tax office/ large taxpayer units are also being directed to scrutinize data of case not selected by the Directorate General I&I-IR for scrutiny.
During preliminary probe, notices under section 176 of the Income Tax Ordinance, 2001 are being issued in cases of various gift recipients in TY 2016 in all regional directorates. Through these notices, the respondents are required to furnish details of donors, copies of gift deeds, and details regarding mode of grant of gifts, such as bank accounts, etc, to the Directorate General. The information as and when received, is being duly scrutinized and verified under the provisions of tax laws. Specifically, the following points are being scrutinized:
Firstly, whether is the donor in such good financial position to have made gift as claimed by the recipient? Secondly, whether has the person making a gift income from known sources and duly declared assets from which he/she has made the gift? Thirdly, whether is the outflow of gift properly reconciled by the person making gift in his/her wealth statement? If gift is not in kind ie in cash, whether has it been made through banking channel as prescribed by law, or otherwise?
If all said conditions are complied with and the explanation of person making the gift is found satisfactory, no further action shall be taken. However, if the reply and explanation given by him/her is such that any of the abovementioned legal provisions of Income Tax Ordinance, 2001 is not satisfactory, in such cases, actual sources of income/wealth will be probed and investigated by the department and the quantum of concealment shall be identified. In cases where gifts are not found genuine and concealment of income is identified, the cases will be forwarded to the field formations concerned for adjudication and amendment of income under the provisions of section 122 of the ITO 2001 and for the recovery of evaded amount of taxes. Moreover, in cases where a clear criminal element of wilful misstatement in declarations is found, the Directorate General may exercise the option of lodging a criminal complaint before the special courts of Customs & Taxation of the relevant jurisdiction under Anti Money Laundering Act, 2010, the FBR added.
Copyright Business Recorder, 2017