Taxation of Gifts

The Income Tax Ordinance 2001, (ITO or ITO 2001), provides comprehensive information for the taxation of gifts. Gifts are part of Pakistani culture and world over as well. The taxation authorities try to establish that whether or not the gifts are being declared to inflate assets or to deflate income. We shall be discussing these aspects in a bit detail here under.

As a rule of thumb, gifts presented by non-relatives and in cash are taxable at the hands of the receiver. The definition of Relative is provided by ITO in subsection 5 of section 85 as ” “relative” in relation to an individual, means —

(a)  an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or

(b) of a spouse of the individual; or a spouse of the individual or of any person specified in clause (a).

So now one thing is clear that for tax purposes gifts can only be given by/to the relatives. In all other cases the gifts are recognised as income.
Gifts are chargeable to income under the head income from other sources as defined in clause (la) of subsection 1 of Section 39, which states “subject to sub-section (3), any amount or fair market value of any property received without consideration or received as gift, other than gift received from 6[relative as defined in sub-section (5) of section 85].

Many novice, unprofessional quacks make a common error (rather wilful declaration) which is to declare value of the gift at the hand of receiver as nil or Zero or at the market value. This declaration of gift at the hands of receiver results in your income tax returns being selected for audit and then such quacks then charge hefty amounts for litigation and replies of such audits. Reason being many tax consultants offer very low service fees for filing of return and they mostly rely on earning through tax audits and notices.

Another important thing to remember is that gifts given or received must be properly declared in your Income Tax Return and other official, government and court documents such as Asset Declaration Statements submitted by Civil Servants and Armed Forces Personnel, Assets details filed by Politicians with Election Commission of Pakistan, and with Courts. A slight error in these declaration can cause nerve shaking litigation.
In short, this will not be an over emphasis to say that always hire professionally trained tax consultants  ( and other consultants) for your gift declaration or else you may end up losing your precious time, money and mental comfort in lengthy legal battles which can linger on and on till Supreme Court for years.