Filing Taxes Illegal Income: Rules, Challenges, and Opportunities

filing tax illegal

Filing taxes illegal income provisioned by the clause income from illegal activities is subject to taxation but creates a conflict with the right against self-incrimination. To resolve this, the judiciary might impose “use” restrictions, ensuring reported information isn’t directly used against individuals in criminal proceedings related to the illegal activities.

The main purpose of the state tax laws is to collect taxes from the public by taxing their income. The other purpose is to ascertain the legitimacy of the income so that none can harm the system of the state by tax aversion or may affect the equitable opportunities of the people by using illegitimate sources of earnings. 

Despite the state controls people do have the ill-gotten money to make them wealthier. A major portion of such ill-gotten wealth money is kept hidden and is out of circulation in the state financial system. In order to get the money back in circulation in the financial system, the state sometimes offers tax amnesty schemes which are normally for the business community who actually hide their wealth by understating their income to avoid higher taxation. The state offers the business community to get a certain amount of their black money converted to white by paying a certain amount of tax on the amount being converted to white money.

Illegal Income Qualified for Amnesty Schemes

  • Amnesty schemes are normally offered for the declaration of hidden income that businesses might have kept hidden with the purpose of tax aversion
  • Amnesty schemes do not cover the money gotten through illegal means like theft, drugs, human trafficking, terrorist financing, corruption, etc

In the case of Pakistan, different tax amnesty schemes were introduced by the government of Pakistan with the motto of getting the money back in circulation in the financial system.

Tax Amnesty Schemes Launched by GOP – Filing Taxes Illegal Income

In order to bring the black money into circulation the Government of Pakistan offered different amnesty schemes in different eras. Major amnesty schemes so offered are described below

  • Tax Amnesty Scheme 1958
  • Tax Amnesty Scheme 1969
  • Tax Amnesty Scheme 1976
  • Tax Amnesty Scheme 1996 & 1997
  • Tax Amnesty Scheme 2000
  • Tax Amnesty Scheme 2018
  • Tax Amnesty Scheme 2018
  • Tax Amnesty Scheme 2022 withdrawn

First Tax Amnesty Scheme 1958

The first ever amnesty scheme in Pakistan was launched in 1958 in Ayub’s Era which resulted in a collection of Rs.1.2B equating to USD0.24$ at that time with 71,289 people registered by filing tax declarations.

Tax Amnesty Scheme 1969

Laster a tax amnesty scheme was offered in Yahya Khan’s era in 1969 with the assets declaration of Rs.920M by 19,600 registered taxpayers.

Tax Amnesty Scheme 1976

A tax amnesty scheme was launched by PM Zulifiqar Ali Bhutto in 1976 with a big decline as just the assets declaration of Rs.270M were made.

Tax Amnesty Scheme 1996 & 1997

PMLN offered the tax amnesty scheme in 2016 resulting in the assets declaration of Rs.0.85B by 10,000 taxpayers. Later in 1997, another amnesty by PMLN resulted in assets declaration of Rs.141M.

Tax Amnesty Scheme 2000

The tax amnesty scheme in 2000 of the Musharraf era remained successful in terms of revenue generation and a total of USD3.0B assets declaration.

The tax amnesty scheme in 2000 of the Musharraf era remained successful in terms of revenue generation and a total of USD3.0B in assets declaration.

tax on salary

Tax Amnesty Scheme 2018

This tax amnesty scheme was offered in respect of undisclosed income and domestic assets held by the person in Pakistan. Under this scheme, individuals, association of persons (AOP), and companies can disclose their undisclosed income and domestic assets by just paying the tax at the rate of 2% or 5% relating to a specific category.

tax on salary

The said amnesty scheme was protected as it was approved by the Parliament of Pakistan under the voluntary Declaration Domestic Assets Act – 2018.

Benefits of the Scheme

  • No Question by authorities about said income and assets
  • Benefit of paying minimal tax rates as compared to the higher tax rates on actual income
  • No penalty on the declaration
  • No applicable surcharge

The amnesty scheme 2018 was a success with the assets declaration of $1 Billion but no substantial impact was seen on tax compliance culture later.

The FBR also released the number of individuals and companies who availed the benefits of the Zero Percent Tax Amnesty Scheme under the landmark order of the Pakistan Information Commission (PIC) where 19 taxpayers availed the benefits of involving an amount of Rs.1.9B.

Tax Amnesty Scheme 2019

PTI government offered the scheme in 2019 where the people can avail the relief excluding holders of public offices, their spouses, dependents and benamidars, and public company u/s 2(47) of ITO.

tax on salary
Eligible Assets and Items

The scheme included the following  

  • benami assets held or acquired before or on the Declaration Date,
  • Pakistan and abroad undisclosed asset till 30-06-2018
  • Undisclosed Sales and Expenses till 30-06-2018
Ineligible Assets and Items

The scheme didn’t include the following

  • Bearer Assets like Prize Bonds and similar financial assets
  • Gold, precious gems and stones
  • Assets made from criminal acts
  • Assets, Sales, and Expenses where court proceedings are pending in court
  • Assets, Sales, and Expenses where initiated tax proceedings are finalized
Filing Taxes Illegal Income
Repatriation and declaration mode for abroad assets
  • Deposit of Cash and FCY and to held in a bank account till 30-06-2019 or investment in Government FCY Bond or in Pakistan Banao Certificates
  • Payment of Tax and repatriation of asset as per process prescribed by SBP
Important Notes of the Scheme
  • The scheme lasted till June 30, 2019
  • The amount under the scheme is neither refundable nor adjustable in tax declaration and should be reflected in financial books, wealth statements, and financial statements.
  • Under any law, for the time being no credit, deduction or allowance shall be available for the assets incorporated under the scheme
  • The declaration will not be valid evidence for the prosecution under any law, made under this amnesty scheme.
Surcharge Rates

Tax Rates under the Scheme

Tax Amnesty Scheme 2022, Later Withdrawn

In March 2022, the PTI Govt. proposed a tax amnesty scheme for industrialists who want to establish new industrial units. The said scheme was supposed to be launched under presidential order. Under the scheme, the authorities and FBR will not ask about the money invested for establishing of new industrial units by paying the tax at the rate of 5% with a requirement the industrial unit should be operational for production till June 30, 2024.

Certain sectors were excluded from the proposed scheme such as sugar, flour mills, cigarettes, beverages, ghee and cooking oil manufacturing excluding extraction units and arms, ammunition and explosive material production.

The funds to be converted to white money will include ill-gotten money from unknown sources but will not include funds under departmental or court proceedings. The minimum requirement for funds eligible for the scheme is Rs.50M and has to be declared in the next tax year.

The amount under the scheme is neither refundable nor adjustable in tax declaration and will be reflected in wealth statements, financial statements, and financial books.

Later the said amnesty was withdrawn with effect from March 2, 2022

In the broader sense when that matter is seen globally, certain rules are defined by the countries for taxing illegal income. Let’s see the case of the United States, where U.S. Congress has enacted the Internal Revenue Code for taxing net income with the provision of taxing illegal income in US. In US a person’s taxable income whether legal or illegal will be subject to federal income tax rules.

Similarly, different countries have enacted different laws to cater the taxation issues relating to illegal income.

FAQs

The state wants to get the hidden money back in circulation. That’s why amnesty schemes are offered by the government to make the money white by giving a subsidized amount of tax on the black money. In this way govt gets 2 benefits, one is to earn income tax and the other is to succeed in moving the hidden back into circulation. The people get their money whited by paying a lesser amount of tax.

Normally hidden income earned through tax aversion is eligible for an amnesty scheme. Any money made through illegal and criminal means is not entitled to become legitimate.

Any amnesty scheme offered by the government carries legal protection under certain laws and fresh legislation. Anyone who qualifies under the offered criteria by the offered amnesty scheme can safely avail the scheme benefits with no risk of further probes by law enforcement agencies.

Conclusion

Under the Finance Act 2023, the revised FBR income tax slabs in Pakistan are effective from July 1, 2023. The revisions impact salary income and other entities. It is crucial for taxpayers to stay informed about the new tax rates and applicable slabs as per the annual income bracket. The taxpayers are recommended to seek professional advice for accurate calculations and ensure compliance of their tax obligation with the updated tax rates.

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