Filing Taxes Illegal Income: Rules, Challenges, and Opportunities

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
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
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 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.

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
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.

Eligible Assets and Items
The scheme included the following
Ineligible Assets and Items
The scheme didn’t include the following

Repatriation and declaration mode for abroad assets
Important Notes of the Scheme
Surcharge Rates
Time Of Payment | Rate of Default Surcharge %age of Tax Amount |
Up to June 30th, 2019 | 0% |
July 1st to September 30th, 2019 | 10% |
October 1st to December 31st 2019 | 20% |
January 1st to March 31st 2020 | 30% |
April 1st to June 30th 2020 | 40% |
Tax Rates under the Scheme
Undisclosed Asset or Income Class | Assets Value Or Income | Applicable Tax Rates |
Immovable Property (Domestic) | 150% of FBR or DC Value, whichever is higher | 1.5% |
Foreign Liquid Assets not Repatriated | Higher of Cost Translated at date of Declaration or Fair Market Value of asset | 6.00% |
Repatriated Foreign Liquid Assets | – do – | 4.00% |
Expenditures Unexplained | Higher of Cost of Expenditure or Fair Market Value | 4.00% |
Sales Undisclosed | 2.00% | |
Other Assets Either Domestic or Foreign | 4.00% | |
Immovable Property Abroad | 4.00% | |
FCY held in Foreign Currency Account in Pakistan | 4.00% |
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
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.