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Government of Pakistan

Revenue Division

Federal Board of Revenue

Inland Revenue

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C.No.6(9)S(IR-Operations)/2021 Islamabad, August 30, 2021

the spotlight both from the tax policy and tax law enforcement perspectives – more

so, since early 1970s. In the wake of workers’ remittances starting to assume

central role in the external sector management over the past few decades, in

addition to Federal Board of Revenue (FBR), and State Bank of Pakistan (SBP),

higher judiciary has also gained significant importance. The multiplicity of players,

their overlapping roles, and lack of systematic coordination mechanisms amongst

them – have many a time, led to policy paradigms that are checkered, at best, and

conflicting, at worst – with innovations in banking and trans-border money transfer

modes and judicial activism confounding the confusion even further. This

conflicting conundrum between policy planks and judicial pronouncements has

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.

(A) Historical Context

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machinery was dislocated but also that the nation had received an economic blow.

There were people who were bringing large sums of money from India and other

countries into Pakistan in order to rehabilitate themselves.” The Government,

therefore, decided not to charge any tax on all those amounts which were brought

from abroad unless there was evidence to prove that the amounts, in fact,

represented income earned via any means in Pakistan or that such amounts were

then sent out of Pakistan after September 18, 1949 when Pak Rupee was not

devalued. This conditional tax concession remained available up to 31

1956 despite the fact that the money was remitted into Pakistan through non-

banking channels. Thereafter, instructions were issued under which the amounts

earned abroad by non-resident Pakistanis (NRPs), and remitted into their own

accounts through normal banking channels were to be entitled for exemption from

tax in Pakistan.

4. In 1972, the Economic Coordination Committee of the Cabinet (ECC),

decided that the “origin of funds remitted from abroad for non-repatriable

industrial investment should not be questioned.” A year later, Finance Ordinance,

1973, ended up deleting Section 4(2) of the Income Tax Act, 1922 (“the ITA,

1922”), by implication, expanding the nexus of the term “foreign remittance” to

include spouse, parents, and dependent children subject to the condition that the

5. The Protection of Economic Reforms Act, 1992 (“the PERA, 1992”) was

promulgated as a parallel foreign exchange regulation in Pakistan; it pulverized the

pre-existing one. To give effect to the PERA, 1992, clause (6A), Part IV, 2

Schedule to the ITO, 1979 was inserted vide SRO 219(I)/01, dated March 16,

1991, which effectively amnestized “any amount of foreign exchange” deposited in

a private foreign currency account (FCA) held with an authorized bank in Pakistan

in accordance with SBP’s Foreign Currency Accounts Scheme (FCAS) introduced

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purchasing it from the domestic market, completely got blurred.

6. In the same vein, the Finance Ordinance, 2001 ended up inserting sub-

section (2A) in section 13 of the ITO, 1979, to amnestize “any amount of foreign

exchange remitted from abroad through normal banking channels and got enchased

in Pakistan rupees from a scheduled bank and a certificate is produced to that

effect from such bank.” Upon promulgation, the ITO, 2001 also carried a pari

materia provision in sub-section (4) of section 111 to ensure continuation. This

provision effectively took out of equation the residential status of the remitter and

the locus of earning of the amount. Up until 2015, there was no upper limit to avail

bank concerned.

7. 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, IRS Field

Formations have refused concession vis-à-vis foreign remittances remitted via

have 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 channels”

for all legal purposes.

8. 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

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facie, “prefunded non-resident rupee account and the foreign currency account of

Overseas Money Service Bureaus (MSB), Exchange Companies (ECs), Money

Transfer Operators (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, Hon’ble Supreme Court of

Pakistan in case law titled as Army Welfare Sugar Mills Ltd. & Others vs.

9. The SBP vide Memorandum No.EPD 30-4-2021-97865, dated May 7, 2021,

held their ground and have responded to FBR’s afore-cited observations by stating

that “to claim exemption under aforementioned clause of ITO, 2001, a taxpayer

receiving home remittances” via MSB and ECs “strictly fulfills 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 fulfillment or non-fulfillment of the four cardinal

conditions laid down in the ITO, 2001, under the currently prevailing banking

regulations and practices as under: -

10. Thus, SBP having unequivocally responded to all four critical questions, that

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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

rescinded.

Hammad Hussain Jaffri

Secretary (IR Operations)

Circulation:

(i) SA to Chairman, FBR, Islamabad

(ii) SA to Member (Inland Revenue – Operations), FBR, Islamabad

(iii) Chief Commissioners, LTOs, MTO, CTOs, & RTOs

(iv) Joint Director, Exchange Policy Department, State Bank of Pakistan, I.I.