In this regard, the FBR has issued circular 10 of 2015 here on Thursday. According to the FBR, in para 21 of the circular 2 of 2014, it was clarified that genuineness of gifts, cannot be determined at the stage of registration of immovable properties therefore withholding tax shall apply under Section 236-K of the Income Tax Ordinance, 2001 on the immovable properties transferred by way of gift instrument. However, representations were received by the Board wherein it was emphasised that in case of gift no gain or loss shall be recognised on disposal of assets as envisaged in Section 79. Although this legal position has also been narrated in the Circular No 2 of 2014, yet it asked to withhold tax under Section 236-K for the reason that genuineness of gift would be decided after filing of returns of donor and donee.
These directions in the circular are in conflict with the express provision of non-recognition rules in clause (c) of sub section (1) of Section 79 of the Income Tax Ordinance 2001. Therefore, withholding tax under Section 236-K at the time of registration of immovable properties among family members was agitated and it was requested that bona fide gifts may not suffer from withholding tax. In order to redress the grievances of persons making bona fide gifts, the competent authority is pleased to further clarify that the gifts among family members like spouse, father, mother, son, daughter, brother & sister shall be considered as genuine and shall not suffer from withholding tax under section 236-K of Income Tax Ordinance, 2001, the FBR circular 10 of 2015 added.
The circular 2 of 2014 talks about the said issue. The circular 2 of 2014 said that through the Finance Act, 2014, a new section 236K has been introduced according to which the purchaser of immovable property shall pay advance tax @ 1 percent of the value of the property if the purchaser is a filer, and 2 percent of the value of the property if the purchaser is a non-filer. However, there is no tax if the value of immovable property is less than or equal to Rs 3 million. The prescribed person for collecting this withholding tax shall be any person responsible for registering or attesting transfer of any immovable property and the tax shall be collected at the time of registration or at the time of attestation of transfer, whichever is earlier. The prescribed person/withholding agent under this section shall be required to file withholding statements under section 165.
The circular 2 of 2014 further said that advance tax collected under this section shall be adjustable against the tax liability of the purchaser at the time of filing of return. However, no tax under this section shall be collected in case of the federal government, a provincial government, a local government, a foreign diplomatic mission, or a scheme introduced by the federal government, or a provincial government or any authority established under a federal or provincial law for expatriate Pakistanis.
It is also clarified that since in the case of inheritance, the property is neither purchased nor any consideration is paid, withholding tax under this section shall not be applicable. However, in case of gifts, as its genuineness cannot be determined at that stage withholding tax shall be paid on the value notified by the provincial governments, the taxpayer may claim refund, in case of genuine gift, after filing the return, the circular 2 of 2014 added.