In Pakistan, taxation of gifts and donations is governed by the Income Tax Ordinance, 2001, and the rules made thereunder. A gift is a transfer of property from one person to another without any consideration or compensation, while a donation is a voluntary contribution of money or property made to a charitable organization or a person in need.
Gifts and donations can have different tax implications, depending on the circumstances of the transaction. In general, gifts and donations are not subject to income tax in Pakistan, but there are certain exceptions and limitations that apply.
Gifts
Under the Income Tax Ordinance, 2001, gifts received by an individual or a company are not subject to income tax, except in certain circumstances. Specifically, gifts received by an individual from a non-relative or a related person in excess of Rs. 50,000 per year are subject to income tax at the applicable rate.
For the purpose of this provision, a “related person” includes a spouse, parent, grandparent, child, grandchild, brother, sister, nephew, niece, uncle, aunt, or cousin. Any gifts received from these relatives are exempt from income tax, regardless of the amount.
If an individual receives a gift from a non-relative in excess of Rs. 50,000 per year, the amount in excess of Rs. 50,000 will be subject to income tax at the applicable rate. For example, if an individual receives a gift of Rs. 60,000 from a non-relative, Rs. 10,000 will be subject to income tax at the applicable rate.
In addition, if an individual gifts property to another person, the fair market value of the property at the time of the gift may be subject to income tax as well. However, the fair market value of gifts made by a parent to a child is exempt from income tax, subject to certain limitations.
Donations
Under the Income Tax Ordinance, 2001, donations made to a charitable organization or a person in need are exempt from income tax, subject to certain conditions and limitations. Charitable organizations include entities registered with the Federal Board of Revenue (FBR) as a charitable institution or a non-profit organization, and recognized by the government as such.
The amount of donation that is exempt from income tax depends on the type of organization to which the donation is made. For example, donations made to a charitable institution or a non-profit organization are exempt from income tax up to 30% of the individual or company’s taxable income. Donations made to a government hospital or educational institution are fully exempt from income tax.
To claim the exemption, the donor must provide a copy of the receipt issued by the charitable organization or person in need, as well as any other documentation required by the FBR. In addition, the donor must keep a record of all donations made during the year, including the name and address of the organization or person, the amount of donation, and the date of the donation.
Example:
Let’s say Mr. Khan, an individual taxpayer, makes a donation of Rs. 100,000 to a charitable organization registered with the FBR. Mr. Khan’s taxable income for the year is Rs. 500,000. In this case, Mr. Khan can claim an exemption of Rs. 150,000 (30% of his taxable income) for the donation made. Therefore, his taxable income will be reduced from Rs. 500,000 to Rs. 350,000.
It is important to note that donations made by a company are also subject to certain limitations and conditions. For example, donations made by a company to a charitable organization or a person in need are exempt from income tax up to 20% of the company’s taxable income, subject to certain conditions and documentation requirements.
Non-compliance penalties
Failure to comply with the provisions of the Income Tax Ordinance, 2001, with regard to gifts and donations can result in penalties and fines. For example, failure to declare or disclose gifts received in excess of Rs. 50,000 can result in a penalty of up to 100% of the tax payable on the undisclosed amount. Similarly, failure to maintain proper documentation and records related to donations can result in penalties and fines.
Conclusion
In conclusion, the taxation of gifts and donations in Pakistan is governed by the Income Tax Ordinance, 2001, and the rules made thereunder. Gifts received by an individual or a company are not subject to income tax, except in certain circumstances, while donations made to a charitable organization or a person in need are exempt from income tax, subject to certain conditions and limitations. It is important for taxpayers to understand the provisions and requirements of the law related to gifts and donations to avoid penalties and fines.
