Tax Exemption: Profit on Debt of Non Resident Pakistanis
Tax Exemption on Profit on Bank Accounts of Non Resident Pakistanis
The Income Tax Ordinance, 2001 provides, under Clause 79 of Part-I of the Second Schedule, that profit on debt on bank accounts funded only from foreign exchange are free from taxation. Non-resident Pakistanis typically keep bank accounts in Pakistani banks. Such accounts are in Pak rupees i.e local currency and Pakistani non residents finance those accounts from outside of Pakistan. Hence, Government of Pakistan granted tax exemption on profit on bank accounts of Non resident Pakistanis who fulfill certain conditions.
The government of Pakistan took this step in order to stimulate remittances from Pakistani residents; who are temporarily residing in a country other than Pakistan but who continue to keep a Rupee Account with a Schedule Bank in Pakistan.
Certificate for Tax Exemption on Profit on Debt in Bank Accounts
It is important to note that the withholding agents are obligated to deduct the full amount of tax in accordance with subsection 2 of section 159 of the Income Tax Ordinance, 2001. This legal requirement states that the withholding agents are required to deduct the full amount of tax.
However, in order for the taxpayer to get this relief or incentive, he needs to produce certificate for tax exemption to the the bank wherein the taxpayer is maintaining his account. The taxpayer can apply to his relevant FBR Commissioner Inland Revenue for obtaining such certificate.
When the taxpayer produces the required certificate in accordance with subsection 1 of section 159 of the Income Tax Ordinance, 2001, the bank, in its capacity as a withholding agent, will comply with the certificate and will not deduct tax on profit.
In the event the taxpayer is unable to produce a certificate for exemption from tax in accordance with subsection 1 of section 159 of the Income Tax Ordinance, 2001, the bank, in its capacity as a withholding agent, will deduct full amount of tax from the profit on bank account.
Conditions to Avail Tax Exemption on Profit on Debt
In order to be eligible for relief under this provision, the account holder must meet the conditions set by the Government of Pakistan. Those conditions are:-
- account holder should be a Pakistani citizen and residing outside of the country.
- The profit made on the deposit in bank account must not be attributed to local deposit. It means the deposits has to be through foreign exchange from abroad.
- The account holder can not use the amount of relief /tax exemption to pay back any existing debts. This condition is ridiculous.
