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Taxation Policy for Foreign Remittance

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Taxation Policy for Foreign Remittance

Foreign remittances have multiple socio-economic and political effects for a country. For example, an empirical study concludes that a one percent increase in foreign remittances raises GDP by 0.25% in Pakistan. Foreign remittances have a major role in containing trade and fiscal imbalances. In fact, workers’ remittances have assumed central role in the external sector management over the past few decades.

Therefore, most of the countries, especially the developing ones, have adopted a policy of not taxing the foreign remittances. Pakistan is no exception and historically the Income Tax Act of 1922 vide section 4(2) empowered the Tax Department to tax foreign remittances in the hands of wife sent by the husband working abroad out of his ‘untaxed foreign income’.

At the time of independence, people were allowed to bring money from India and other countries into Pakistan and such inflows of money were declared tax-free. Exemption from taxation was available to any sum of money remitted into Pakistan whether through banking channel or non-banking channel. Effective from April 1, 1956, the amounts that were remitted into Pakistan through the normal banking channels and which entered the foreign exchange control system were declared exempt through Circular No. 7 of 1957.

Nonetheless, after April 1, 1960, only incomes earned abroad by non-resident Pakistanis and remitted into their own accounts through normal banking channels were entitled for exemption from tax.

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.”

The Finance Ordinance, 1973, expanded the scope of the term “foreign remittance” to include spouse, parents and dependent children subject to the condition that the funds had been transferred through normal banking channels to encourage inflow of foreign currency. Throughout 1970s and 1980s, foreign remittances were not taxed in the hands of spouse or other members of the remitter’s family, and were accepted without further questions when claimed as a source against investment, expenditure or purchase of assets.

The Protection of Economic Reforms Act, 1992, was promulgated as a parallel foreign exchange regulation in Pakistan. To give effect, clause (6A), Part IV, 2nd Schedule to the ITO, 1979, was inserted vide SRO 219(I)/01, dated March 16, 1991, which effectively amnestied “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 by the State Bank of Pakistan.”

The Finance Ordinance, 2001, ended up inserting subsection (2A) in section 13 of the ITO, 1979, to amnesty “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 exemption u/s 111(4) of the ITO, 2001. A limit of Rs.10 million was brought in 2018, which was, later on, reduced to Rs.5 million vide Finance Act, 2019. However, this exemption was available subject to the fulfilment of four conditions, namely:
(a) the remitted amount is in foreign exchange;
(b) the amount is remitted into Pakistan through normal banking channels;
(c) the amount is encashed by a scheduled bank; and
(d) a certificate of encashment is issued by the bank concerned.
Sub-section (1) of section 111 provides that where any amount is credited in a person’s books of accounts or a person has made any investment or is the owner of any money or has incurred expenditure or has concealed income and the person offers no explanation about such amount, investment, money, expenditure or income, or the explanation is not satisfactory, such amount or the value of such investment, money, expenditure or income is added to the person’s income chargeable to tax. However, the said provision is not applicable to any amount of foreign exchange which is not exceeding Rs.10 million in a tax year remitted from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank and a certificate to this effect is produced from such bank.

Through the Finance Act, 2019, the limit of Rs 10 million has been reduced to Rs 5 million in a tax year. Therefore, foreign remittances exceeding Rs 5 million do not attract any addition to income chargeable to tax under section 111(1) of the Income Tax Ordinance, 2001. However, if the nature and source of foreign remittance is not explainable, such amount will be added to income chargeable to tax. Even if the amount of foreign remittance is more than Rs 5 million in a tax year, the Commissioner can only ask the source of foreign remittance. In case the source is explainable, no further proceedings will be undertaken.

The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan.
He can be contacted at

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