Are you receiving a gift or donation? You too may have to pay tax

Illustration: TBS

Finance Minister Abul Hassan Mahmood Ali has proposed changes to the Finance Act, requiring both donors and recipients to pay taxes on gifts and donations, with exceptions only for spouses, parents, and children.

An NBR official, seeking anonymity, said the move has been made to squeeze the opportunity of formalisation of illegal income as well as tax dodging. However, though experts have welcomed the move, they said implementing it would be difficult.

According to the proposal, any individual or institution receiving any amount as gift or donation must pay income tax at the regular rate, which can be up to 30%.

However, this won't apply to gifts among husband and wife, father and mother, and children.

The donor will also be required to declare the source of the funds in their tax filings to prevent the legalisation of illegal earnings.

Snehasish Barua, a chartered accountant and a director of SMAC Advisory Services Ltd, said, "As per Gift Tax Act 1990, there is a list of exemptions for the donor. So, a donor, although being exempt from payment of gift tax, will be required to pay tax under Income Tax Act 2023."

According to section 2(f) of the Gift Tax Act, a "gift" is defined as the voluntary transfer of any movable or immovable property without monetary consideration from one person to another. 

Gifts up to Tk20,000 are exempt from tax as per the current Act, which stays the same in the proposed Act for donors only. The person or institution providing the gift is responsible for paying the tax, which can be up to 20% of the gift amount. However, gifts exchanged between spouses, parents, and children are also exempt from this tax.

However, NBR officials said, despite the law being there, in practice, there are rarely any instances of tax being collected on gifts.

According to the proposed Finance Act, all recipients of gifts, including siblings, third parties, and institutions, would be brought under the tax net. As a result, the person giving the gift will have to pay tax, and the recipient will also have to pay income tax at the regular rate. 

The new budget sets the maximum income tax rate at 30%. Consequently, for large gifts or donations, both parties will naturally face higher tax rates.

Barrister Tanjib Ul Alam, a renowned lawyer, told The Business Standard, "There is a connection between gifts and corruption. Typically, attempts are made to legitimise income through gifts using corrupt means."

He further said, "Currently, anyone who gives the gifts has to pay the tax only. But, according to the new proposal, those who receive gifts will also have to pay tax."

He further elaborated the point by referencing Professor Dr Muhammad Yunus, saying, "Dr Yunus finally paid taxes for donating to his trust. In the future, in such cases of donations, both the donor and the trust - meaning both parties - will face tax implications."

Currently, apart from exempt individuals, any other individual or entity can donate to another person or entity. However, according to the law, those who donate must declare that property in their tax file, and tax will be imposed accordingly, following the donation laws and the specified rates.

However, talking to some tax officials, it was found that they do not verify whether the donated property is shown in the donor's tax file at the field level. Additionally, even though it is stated in the law, no tax is imposed on the donated property when donated.

A field level NBR official, seeking anonymity, said, "Apart from Dr Yunus's case, I am not aware of any other cases where tax allegations have been made against anyone else for making donations."

Another senior official from the NBR told TBS, "Donations were a means to legitimise illegally gained money. Now, with the new law, both the donor and the recipient must mention the source of income in their tax files."

"As a result, the opportunity to legitimise illicitly acquired income through donations to third parties or institutions will be reduced. Even if donations are made among family members, the source of income must be disclosed," he added.

Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI), supported the move, noting that similar practices exist in other countries where tax is applied to donation recipients.

However, he pointed out the challenges in implementing this rule, especially concerning assets. 

"How will the true value of donated assets be assessed? There is a risk of undervaluation to evade taxes," he said. 

On the other hand, Barrister Tanjib said, "This might lead to increased tendencies among owners of illicit money to smuggle funds to avoid taxes."

He added that new regulation might not significantly reduce corruption.