New-found wealth: ‘Diyat is liable to tax’

Income Tax Ordinance 2001 does not exempt ‘casual or non-recurring’ income. DESIGN: ESSA MALIK

According to a tax consultant who spoke on condition of anonymity, “Any income earned in Pakistan is liable to be taxed in Pakistan.” Diyat, he explained, would have been exempt from tax under the Income Tax Ordinance of 1979, since it falls in the category of casual or non-recurring income, which was exempt. However, there is no such exemption in the Income Tax Ordinance of 2001. “All Diyat payments are liable to tax deduction,” he said.

In the Davis case, when the heirs file their income tax returns they will have to include the amount they received as Diyat and will be taxed on it.

But will the tax collection authorities keep a check on the heirs? The consultant said that ideally they should. However, if reports of the families leaving Pakistan are true, they could evade paying taxes on the payments. Reports of the families being spirited away also raise several other questions, including whether immigration procedures were followed and if the Diyat payments were taken out of the country in person or via a bank transfer.

Scanned copies of the Diyat settlement documents only show the receipt of the money by the heirs, but do not reveal how the payments were made.

Additionally, whoever issued the Diyat payments should have deducted taxes at source. According to the consultant: “If these amounts were paid by Davis then it’s a different issue, one has to see if he was a resident of Pakistan or not. Since the Diyat has reportedly been paid by the government of Pakistan, the payment they made would either be for services rendered or for the execution of a contract. Since there were no ‘services rendered’, the latter seems to be the case. The government should have deducted at least six per cent in taxes while giving these amounts, according to the rate that applies.”

According to Reuters news agency, US Secretary of State Hillary Clinton denied that the US had paid compensation. When asked who did, she replied, “You will have to ask the families.” She also refused to say if the Pakistani government had paid, saying, “You will have to ask the Pakistani government.”

The Washington Post reported that the US government expected to reimburse Pakistani authorities, and quoted a US official saying, “We expect to receive a bill.”

The tax man is only one of the families’ potential worries. “They have made these families a prime target for kidnappers,” said a senior criminal lawyer. Citizens Police Liaison Committee Chief Ahmed Chinoy disagreed. “These problems of targeted kidnappings and robberies are not as prevalent in Punjab as they once were in Karachi. However, as in any other country, this new wealth may be an issue. If you become a ‘have’ from a ‘have not’, you do have to face the problems of the ‘haves’.”

Published in The Express Tribune, March 19^th, 2011.