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TAX SYSTEM OF PAKISTAN:

The taxation structure of Pakistan includes taxes on income and profits, consumption, capital gains, and wealth in addition to levies, surcharges, and customs and excise duties. The Constitution of Pakistan provides division between federal and provincial level taxes. Broadly the taxes are categorized as ‘direct’ or ‘indirect’ taxes. Direct taxes are largely under the ambit of Federal Government.


FEDERAL TAXES PROVINCIAL TAXES
Income tax General Sales Tax (GST) on services
General Sales tax (GST) Stamp Duty
Custom Duties Motor vehicle Tax
Excise Duties Urban Immovable Property Tax
  Professional Tax

Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below:


DIRECT TAXES:

Direct taxes primarily comprise income tax, along with supplementary role of wealth tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads:

  • Salaries
  • Interest on securities
  • Income from property
  • Income from business or professions
  • Capital gains; and
  • Income from other sources

INDIRECT TAX (E.G. VAT/GST):

Indirect Tax - Sales Tax

Standard Rate The standard rate of sales tax is 16 percent. However, this may vary (up, down or zero) in specified cases. Certain goods are exempt from sales tax.

Sales Tax is levied at various stages of economic activity on:

  • All goods imported into Pakistan, payable by the importers;
  • All supplies made in Pakistan by a registered person in the course of furtherance of any business carried on by him;
  • There is an in-built system of input tax adjustment and a registered person can make adjustment of tax paid at earlier stages against the tax payable by him on his supplies.

CORPORATE INCOME TAX:

Tax Rate

Tax rate is 35 percent. The exception to this is small companies, which are taxed at 25 percent.


Residence

A company is considered to be resident in Pakistan if it is incorporated, formed by or under any law in force in Pakistan.

Companies incorporated under foreign law are considered to be Pakistan resident if control and management of the affairs of the company is situated wholly in Pakistan at any time during the year. Resident companies are taxed on their worldwide income. Non-resident companies are taxed only on their Pakistan source income.


Compliance requirements

Assessment system – Self assessment. However, an assessment under self assessment scheme may be subject to tax audit and amendment.

Filing due date

  • For companies with tax year ending between 1 July and 31 December: 30 September following the end of tax year
  • For companies with tax year ending between 1 January and 30 June: 31 December following the end of tax year

International Withholding Tax Rates

Dividends paid to non-residents are subject to withholding tax of10 percent. For dividends declared/distributed by a purchaser of a power project privatized by WAPDA (Water and Power Development Authority) or a company setup for power generation, the withholding tax rate on dividends is 7.5 percent.

Royalties and fees for technical service paid to non-residents are subject to withholding tax of 15 percent.

Interest payments to non-residents (that have no permanent establishment in Pakistan) are subject to withholding tax of 10 percent.

Other payments to non-residents, for which a withholding tax rate is not specified in the Income Tax Ordinance, 2001 (the Ordinance), is subject to withholding tax of 20 percent. The withholding tax rates may be reduced under the terms of applicable tax treaties.


Holding rules

Dividends distributed by a resident company are taxable at the rate of 10 percent. Dividends paid by a non-resident company are taxable at the corporate tax rate of 35 percent in the hands of resident company.

Capital gains tax applies in Pakistan. However, the tax treatment of the capital gain depends on a range of factors including the industry and the holding period.

For companies which are in the banking industry in Pakistan, a gain on the sale of shares of listed companies (disposed of after one year or more from acquisition), shall be taxed at 10 percent. All other capital gains for companies in the banking industry shall be taxed at 35 percent.

Capital gain tax rates on securities vary according to the status of the taxpayer deriving such gain, as outlined below.


Tax Year Insurance Companies Others
  Held <6 months Held 6-12 months Held <6 months Held 6-12 months
2012 10% 8% 10% 8%
2013 12.5% 8.5% 10% 8%
2014 15% 9% 17.5% 9.5%
2015 17.5% 9% 17.5% 9.5%
2016 - - - 10%

Where the security is held for more than twelve months, the capital gains tax rate is 0 percent.

Capital gains on capital assets other than securities shall be taxable at 35 percent, unless the capital asset has been held for more than twelve months, in which case 75 percent of the gain will be taxable.


Other specific anti avoidance rules

Specific anti avoidance rules apply for salary paid by private companies, unexplained income or assets, security transactions, payment of royalty, management fee, interest by permanent establishment to head office or another permanent establishment of head office (except reimbursements).


Rulings

Advance rulings may be obtained by non-residents with the exception of permanent establishments of a non-resident.


Intellectual Property Incentives

A person is allowed an amortisation deduction under income tax law in a tax year for the cost of the person’s intangibles.


R&D Incentives

100 percent deduction is allowed for research and development expenditure incurred in Pakistan but is restricted to the extent of research which has been undertaken in Pakistan.


Other incentives

Non-residents operating through a branch in Pakistan can claim a deduction for head office expenses (including regional head office costs) which should be in the nature of executive and general administration expenses. Such expenses can be remitted to the head office without payment of withholding taxes, subject to approval from the State Bank of Pakistan.


Other tax incentives include

  • 50 percent initial allowance (tax depreciation / capital allowances) on plant and machinery
  • 90 percent first year allowance (tax depreciation / capital allowances) for specified companies
  • 90 percent accelerated tax depreciation for alternative energy projects
  • Tax credit of 10 – 20 percent of the investment made for balancing, modernization and replacement
  • Tax credit of 100 percent of tax payable for five years to newly established industrial undertakings
  • Tax credit of 100 percent of tax payable for five years attributable to expansion projects or new projects by an existing
  • industrial undertaking

Tax exemptions, subject to meeting specified criteria, may be available in following sectors

  • Power generation
  • Information Technology
  • Agriculture

UNILATERAL RELIEF:

A person resident in Pakistan is entitled to a relief in tax on any income earned abroad, if such income has already been subjected to tax outside Pakistan. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad, whichever is lower.


AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION:

The Government of Pakistan has so far signed agreements to avoid double taxation with 39 countries including almost all the developed countries of the world. These agreements lay down the ceilings on tax rates applicable to different types of income arising in Pakistan. They also lay down some basic principles of taxation which cannot be modified unilaterally. The list of countries with which Pakistan has concluded tax treaties is given below:


Austria Belgium Bangladesh Canada China
Denmark Egypt France Finland Germany
Greece India Indonesia Iran Ireland
Italy Japan South Korea Lebanon Libya
Malta Mauritius Saudi Arabia Singapore Poland
Romania Switzerland Thailand Sri Lanka Sweden
Turkmenistan U.K. Turkey Tunisia Kazakistan
U.A.E. U.S.A

PERSONAL TAXATION:

Top Rate

Personal tax rates differ between salaried taxpayers and non-salaried taxpayers. The top tax rate for salaried taxpayers is 20 percent and applies to income in excess of PKR 2,500,000.

For non-salaried taxpayers, the top tax rate is 25 percent and applies to income in excess of PKR 2,500,000.


Social Security

The following are payable by employers

  •  Social Security – 7 percent of salary of insurable employees
  • Employees Old Age Benefit (EOAB) – 5 percent of salary of insurable employees For EOAB, employees are also liable to pay Rs. 80 per month, being one percent of the minimum wage, in addition to the contribution made by the employer. Usually, employers deduct this amount from the salary and pay it over to the EOAB Institution on behalf of their employees together with the employer’s contribution.

OTHER TAXES:

Customs duty

Goods imported into Pakistan are liable to customs duties at the prescribed rates. However, zero-rating and concessionary rates of customs duty are generally applicable for industrial raw materials, semi-finished goods and capital goods, particularly if these are not being manufactured in Pakistan, machinery for power projects, oil and gas projects etc.

The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery and raw material lower than those on consumer goods.


Excise duty

Federal excise duty (FED) is levied on specific goods imported or manufactured. Specified services provided and rendered in Pakistan, at prescribed rates. Generally, FED is charged on the value or retail price basis. Zero percent FED rate is applicable for exported goods or specified goods. Items typically subject to FED include (amongst others); edible oils, aerated waters and concentrates, tobacco and cigarettes, cement, lubricants and fuel oils and transportation vehicles.


Stamp duty

Stamp duty is imposed on instruments and documents (and for matters connected and incidental thereto). Stamp duty is a provincial levy which is payable on every instrument executed, drawn or presented in Pakistan, every document presented or filed in the various courts, check or promissory note negotiated in Pakistan (but drawn outside of Pakistan) and every instrument executed outside Pakistan and received in Pakistan that relates to any property situated in Pakistan.


Property tax

There is a provincial tax levied on the value of property, with the rates varying between provinces.


Inheritance / gift tax

There is no inheritance or gift tax in Pakistan.


Capital value tax

Capital value tax (CVT) is charged on the purchase of Modaraba certificates or registered instruments of redeemable capital including shares. CVT is a tax on the capital value of specified assets and is payable on the acquisition of an asset by every individual, association of persons, firm or company. The rate of CVT is 0.02 percent of the purchase value of the Modaraba certificates and instrument of redeemable capital.

CVT is also imposed on the real estate sector at various rates depending on the nature and location of the property.


Professional tax

Professional tax is a provincial levy on trade, professions.

MINIMUM WAGE:

The minimum wage rate for unskilled workers is

  • Rs.12, 000 in the provinces of Punjab, Khyber Pakhtunkhwa and federal areas;
  • Rs. 11,000 in Sindh province
  • In the Baluchistan province, the minimum wage is still Rs. 9,000 per month.

Minimum wages for semi-skilled and skilled workers are determined by the Minimum Wage Boards constituted under the Minimum Wages Ordinance, 1961.

Minimum Wage is the wage level (set by Government, either after consultation with the social partners i.e. worker organizations and employer associations or unilaterally) below which it is illegal for the employer to pay his/her employees.

Minimum Wage in Pakistan is set by the following two acts:

  • Pakistan Minimum Wages for Unskilled Workers Ordinance, 1969
  • the Minimum Wages Ordinance, 1961

SOCIAL SECURITY:

The Government of Pakistan had promulgated the Employees’ Old-age Pensions Ordinance in 1972. However, this was never implemented. Later on, in 1976, this was substituted with an act of parliament, called Employees’ Old-Age Benefits Act, 1976. This social insurance system was started to achieve the objective of article 38 (c) of the Constitution, which is as under:

The State shall

Provide for all persons employed in the service of Pakistan or otherwise, social security by compulsory social insurance or other means;

This Act is applicable to the private sector only while Government has created special systems for public-sector employees (where Civil Pension Rules are applicable); members of the armed forces; police officers; and employees of statutory bodies, local authorities, and railways. Other than these, Government is also managing other social assistance programs for the welfare of destitute and needy citizens. Under the Zakat and Ushr Ordinance, 1980, benefits are provided to the poor Muslim citizens of Pakistan while under the Pakistan Baitul Mal Act, 1992 and Benazir Income Support Program Ordinance, 2010 (program was started in 2008); assistance is being provided to all the citizens of Pakistan irrespective of their religion.

Employees’ Old-Age Benefits Act is applicable on all firms (industrial or commercial, including banks) where 5 or more workers, whether contractual or regular, are employed or were employed during past 12 months. The business with less than five employees can get their employees registered with EOBI on voluntary basis.

As for the benefits, it provides following four types of benefits to insured persons or their survivors.

  • Old-Age Pension (or Reduced Pension)
  • Survivors’ Pension
  • Invalidity Pension
  • Old-Age Grant (if an employee is not eligible for pension)

Employees’ Old-Age Benefits Institution (EOBI) manages implementation and enforcement of this act. EOBI is a semi-autonomous institution working under auspices of Ministry of Labor and Manpower. A tripartite corporate Board of Trustees manages working of EOBI where, along with the Government officials, labour and employer representatives are also present.

Chapter V of the Act talks about these benefits and requires the payment of monthly old age pension to an employee if;

He is 60 years of age (in case of woman, 55 years of age; age limit is also 55 years for male miners engaged in mining for at least 10 years of employment)

Contributions in respect of him/her were paid for at least 15 years

In accordance with Chapter III of the Act, an employer is required to submit his and employee’s contribution to a bank designated by EOBI before 15th of every month. An employer has to pay contribution equal to 5% of the minimum wage while an employee has to pay that contribution at the rate of 1% of minimum wage.

Keeping in view minimum wage of PKR 12,000 in Federal Areas, Punjab & KPK

  • An employer has to pay (5% of PKR 12,000= PKR 600)
  • An employee has to pay (1% of PKR 12,000= PKR 120)

So, in total, they have to submit PKR 720 for every insured employee, no matter what is his income level. Other than employer and employees, federal government may also make contribution to make up any deficiencies.

RENTING LAND/OFFICE/ FACTORY IN PAKISTAN:

If foreign companies require renting land / office / factory or waring house they had to acquire permission from Board of investment Pakistan. BOI grants permissions for the following:


Branch/Liaison Office

Board of Investment (BOI) grants permission to foreign companies to open their Branch Office and Liaison Office in Pakistan.


Branch Office

Branch Office is established by a foreign company to fulfill its contractual obligations with the public or private sector in Pakistan. Their activity will be restricted to the work mentioned in the agreement/contract signed. However they cannot undertake any commercial/trading activities.


Liaison Office

Liaison Office is established by a foreign company for promotion of product(s), provision of technical advice & assistance, exploring the possibility of joint collaboration and export promotion. However they cannot undertake any commercial/trading activities.


Period of Permission

The permission shall be issued for a period of 1-5 years.


Renewal

The permission granted by BOI shall be renewable subject to provision of all required documents and fees.


PROCEDURE:

Step - 1 : Required Documents (one original and five copies)

  • Application form (duly filled in and signed with stamp).
  • Copy of registration of company duly attested by respective Pak Embassy.
  • Copy of Article of Memorandum of Association duly attested by Pak Embassy.
  • Copy of Resolution/Authority letter of the company to establish Branch/Liaison Office in Pakistan.
  • Company Profile.
  • Designated person authorized to act on behalf of the company.
  • Copy of contract agreement ( in case of Branch office only).
  • Fees 3000/2000 US $ for Branch/Liaison office for initial period of one year.

Step - 2 : Evaluation

  • On receipt of above documents BOI examines the documents and circulates the same to all concerned quarters for their comments, views/NOC.

Step - 3 : Issuance of Permission

  • BOI issues permission after completion of 7 weeks time period. The said permission shall be liable to be cancelled, if adverse remarks are reported or NOC is not supported by any concerned quarter at later stage.

The service charges for availing the services provided by different service providers for electricity, water, telephone, internet and other things depends on the types of services being used. Many of the companies offer various business or corporate packages for the use of these services. The rates are usually charged depending upon the type of service that is being used by the business or corporation.

The petroleum products prices are revised on every month by the Government (Ministry of Finance) and petroleum prices are suggested by the OGRA (Oil & Regularity Authority of Pakistan) on every end of the month to decide new petroleum products prices for the next month and on wards.

Petroleum Prices Archive

Date HOBC Premium HS Diesel LS Diesel Kerosene
Dec 01, 2014 Rs.106.27/Ltr Rs.84.53/Ltr Rs.94.09/Ltr Rs.77.98/Ltr Rs.83.18/Ltr
Nov 01, 2014 Rs.116.45/Ltr Rs.94.19/Ltr Rs.101.21/Ltr Rs.83.42/Ltr Rs.87.52/Ltr
Oct 01, 2014 Rs.131.13/Ltr Rs.103.62/Ltr Rs.107.39/Ltr Rs.91.46/Ltr Rs.95.6/Ltr
Sep 01, 2014 Rs.129.64/Ltr Rs.106.56/Ltr Rs.108.34/Ltr Rs.92.08/Ltr Rs.97.05/Ltr
May 01, 2014 Rs.131.26/Ltr Rs.107.97/Ltr Rs.109.34/Ltr Rs.94.13/Ltr Rs.98.07/Ltr
Apr 01, 2014 Rs.136.57/Ltr Rs.108.31/Ltr Rs.113.85/Ltr Rs.95.06/Ltr Rs.101.15/Ltr
Mar 01, 2014 Rs.137.73/Ltr Rs.110.03/Ltr Rs.116.75/Ltr Rs.101.24/Ltr Rs.108/Ltr