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EY Ford Rhodes
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Email: frsh.isb@pk.ey.com Islamabad Pakistan
Street address: Eagle Plaza 75, West, Blue Area Fazl-e-Haq Road Blue Area Islamabad 44000 Pakistan
International Tax and Transaction Services – International Corporate Tax Advisory, International Tax and Transaction Services – Transaction Tax Advisory, Business Tax Advisory, Tax Policy and Controversy, People Advisory Services and Indirect Tax
Aamir Younas
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Mobile: +92 336-255-1660
Email: aamir.younas@pk.ey.com
Karachi GMT +5
EY Ford Rhodes
Mail address:
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+92 (21) 111-113-937
Fax: +92 (21) 3568-1965
Email: frsh.khi@pk.ey.com Karachi 75530 Pakistan
Street address: Progressive Plaza Beaumont Road Karachi 75530 Pakistan
Principal Tax Contact and Business Tax Services Leader
Haider Ali Patel
+92 (21) 111-113-937
Mobile: +92 333-215-6525
Email: haider.a.patel@pk.ey.com
International Tax and Transaction Services – International Corporate Tax Advisory
Salman Haq
Business Tax Advisory
Haider A. Patel
Salman Haq
Saleem Siddiqie
+92 (21) 111-113-937
Mobile: +92 300-823-3699
Email: salman.haq@pk.ey.com
+92 (21) 111-113-937
Mobile: +92 333-215-6525
Email: haider.a.patel@pk.ey.com
+92 (21) 111-113-937
Mobile: +92 300-823-3699
Email: salman.haq@pk.ey.com
+92 (21) 111-113-937
Mobile: +92 336-255-1615
Email: muhammad.saleem@pk.ey.com
B. Taxes on corporate income and gains
Corporate income tax. Companies that are resident in Pakistan are subject to corporation tax on their worldwide income. Tax is levied on the total amount of income earned from all sources in the company’s accounting period, including dividends and taxable capital gains. Branches of foreign companies and nonresident companies are taxed only on Pakistan-source income. A company is resident in Pakistan if it is incorporated in Pakistan or if its control and management are exercised wholly or almost wholly in Pakistan during the tax year. Company is defined to include the following:
• A company as defined in the Companies Act, 2017 (formerly the Companies Ordinance, 1984)
• A body corporate formed by or under any law in force in Pakistan
• An entity incorporated by or under the corporation law of a country other than Pakistan
• The government of a province
• A local government in Pakistan
• A foreign association that the Federal Board of Revenue declares to be a company
• A modaraba, cooperative society, finance society or other society
• A nonprofit organization
• A trust, an entity or a body of persons established or constituted by or under any law that is in force
• A small company
Tax rates. For the 2024 tax year (income year ending on any day between 1 July 2023 and 30 June 2024), the tax rate is 29%. However, for banking companies, the tax rate is 39%.
Small companies are subject to tax at a rate of 20% for the 2023 tax year.
Small companies are companies incorporated after 1 July 2005 that meet the following conditions:
• They have paid-up capital and undistributed reserves of not exceeding PKR50 million.
• They have no more than 250 employees at any time during the year.
• They have annual turnover not exceeding PKR250 million.
• They were not formed as a result of a restructuring involving the splitting up or reorganization of an already existing business.
• They are not a small or medium-sized enterprise, which is an enterprise not engaged in manufacturing that has business turnover in a tax year not exceeding PKR250 million.
The gross revenue of nonresidents’ air transportation and shipping businesses is taxed at 3% and 8%, respectively. This income is not subject to any other tax.
The shipping business of resident persons is taxed on the basis of registered tonnage per year.
Builders and developers are subject to tax at varying rates depending on the area and size of the property.
Certain types of income are subject to final withholding taxes. For information regarding these taxes, see Section A and Withholding taxes.
goods, against tax payable (including minimum and final taxes) in the following situations:
• Greenfield industrial undertaking engaged in manufacturing of goods or shipbuilding, subject to the condition that the person is incorporated between 30 June 2019 and 30 June 2024, is not formed by the splitting up or reconstitution of an undertaking already in existence or by transfer of machinery, plant or building from an undertaking established in Pakistan prior to commencement of the new business and is not part of an expansion project
• Industrial undertaking set up by 30 June 2023 and engaged in the manufacturing of plant, machinery, equipment and items with dedicated use for generation of renewable energy from sources such as solar and wind, for a period of five years beginning from the date such industrial undertaking is set up.
Unadjusted credit, if any, in the year of investment can be carried forward to the following two tax years.
Capital gains. Capital gains on shares of public companies, vouchers of the Pakistan Telecommunication Corporation, modaraba certificates, instruments of redeemable capital, debt securities and derivative products are taxable. The tax rates for the 2023 tax year for capital gains on securities acquired on or after 1 July 2022 are shown in the following table.
The holding period does not exceed one year 15
The holding period exceeds one year but does not exceed two years
The holding period exceeds two years but does not exceed three years 10
The holding period exceeds three years but does not exceed four years
The holding period exceeds four years but does not exceed five years 5
The holding period exceeds five years but does not exceed six years
The holding period exceeds six years 0
The tax rate for capital gains on securities acquired on or before 30 June 2022 is 12.5%, regardless of the holding period of the securities.
For capital gains on future commodity contracts entered into by members of the Pakistan Mercantile Exchange, the rate is 5%.
Capital gains earned on disposals of debt instruments and government securities purchased by foreign portfolio investors (not having a PE in Pakistan) through an SCRA is subject to deduction of tax at 10% by the banking companies maintaining the SCRAs of such investors. The tax collected by the banks is treated as a final tax on capital gains earned by such nonresident investors.
Capital gains on other assets (including non-public securities) are taxable at the corporate rate.
Capital gains on the disposal of listed securities and the tax payable on the gains are computed, determined, collected and deposited on behalf of a taxpayer by the National Clearing Company of
Pakistan Limited (NCCPL), which is licensed as a clearing house by the Securities and Exchange Commission of Pakistan. However, the NCCPL does not collect tax from the following categories of the taxpayers:
• Mutual funds
• Banking companies, nonbanking finance companies and insurance companies
• Modarabas
• Companies, with respect to debt securities only
• Other persons or classes of persons notified by the Federal Board of Revenue
The investors listed above are required to self-pay their capital gain tax obligation on a quarterly basis at a rate of 1.5% or 2% of the amount of gain, depending on the holding period of the securities. They must file a statement of advance tax and pay the tax within 21 days after the end of each quarter.
Capital gains on immovable property are calculated as consideration less cost.
The gain on immovable property is subject to tax at the following rates:
Holding period
Gain
Where the holding period 15% on open plots, does not exceed one year constructed property and flats
Where the holding period 12.5% on open plots, 10% on exceeds one year but does constructed property and 7.5% not exceed two years on flats
Where the holding period 10% on open plots, 7.5% on exceeds two years but does constructed property and 0% not exceed three years on flats
Where the holding period 7.5% on open plots and 5% on exceeds three years but does constructed property not exceed four years
Where the holding period 5% on open plots and 0% on exceeds four years but does constructed property not exceed five years
Where the holding period 2.5% on open plots exceeds five years but does not exceed six years
Where the holding period 0% on open plots exceeds six years
Capital losses can be offset only against capital gains. Capital losses can be carried forward for six years. Capital losses on disposals of securities (shares of public companies, vouchers of the Pakistan Telecommunication Corporation, Modaraba Certificates, instruments of redeemable capital and derivative products) in the 2019 tax year and onward that have not been set off against capital gains on the disposal of securities chargeable to tax can be carried forward up to the three tax years immediately following the tax year in which loss was first computed.
Administration
Business license. Every person engaged in a business, profession or vocation is required to obtain and display a business license as prescribed by the Federal Board of Revenue. The Commissioner of Inland Revenue may impose a fine on a person who fails to
obtain such license. The amount of the fine is PKR20,000 in the case of persons deriving taxable income and PKR5,000 in other cases if income is exempt from tax or below the tax limit. The Commissioner also may cancel the business license of a person if the person fails to notify the change in particulars of the business license to the Commissioner within 30 days of such change or if the person is convicted of any offense under any federal tax law.
Filing requirements. The tax year commences on 1 July and ends on 30 June. Companies are required to end their fiscal years on 30 June. Special permission is required from the Commissioner of Inland Revenue to use a different year-end. The Federal Board of Revenue has specified 30 September as the year-end for certain industries, such as sugar and textiles, and 31 December as the year-end for insurance companies.
An income tax return must be filed by 30 September of the following year if the company’s year-end is from 1 July through 31 December and by the following 31 December if the year-end is from 1 January through 30 June. Any balance due after deducting advance payments and withholding taxes must be paid when the tax return is filed.
Advance tax payments. In general, advance tax is payable quarterly based on the tax to turnover ratio of the latest tax year. However, banking companies must pay advance tax on a monthly basis. If the tax liability is estimated to be more or less than the tax charged for the prior tax year, an estimate of tax liability can be filed and advance tax liability can be paid in accordance with such estimate, subject to certain conditions. For taxpayers other than banking companies, the due dates for the advance tax payments are 25 September, 25 December, 25 March and 15 June. Banking companies must pay advance tax by the 15th day of each month.
Adjustable quarterly advance tax on capital gains from the sale of securities is payable on the capital gains derived during the quarter by companies within 21 days after the end of each quarter at a rate of 2% if the holding period is less than 6 months and 1.5% if the holding period is between 6 and 12 months.
Minimum tax. Resident companies, PEs of nonresident companies and resident banking companies are subject to a minimum income tax equal to 1.25% of gross receipts from sales of goods, services rendered and the execution of contracts, if the corporate tax liability is less than the amount of the minimum tax. The excess of the minimum tax over the corporate tax liability may be carried forward and used to offset the corporate tax liability of the following three tax years. Reduced rates are applicable on certain taxpayers, including the following:
Rate of minimum tax applied to a
Taxpayer taxpayer’s turnover (%)
Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (with annual turnover exceeding PKR1 billion), Pakistani airlines and the poultry industry 0.75 Oil refineries, motorcycle dealers registered under the Sales Tax Act, 1990 and oil marketing companies 0.5
(b) Property income is subject to bottom-line profit taxation. The tax deducted at source may be credited against the eventual tax liability. The rate is 15% for payments made to companies. For payments made to individuals or associations of persons, the rate ranges from 0% to 35%, depending on the amount of rent. The rate is doubled for persons not appearing in the ATL.
(c) Tax deducted on the sale of goods is a minimum tax for resident companies as well as for PEs of nonresidents in Pakistan. The tax deduction is an advance tax adjustable against the eventual tax liability for listed companies and companies engaged in the manufacturing of goods. No withholding is required on imported goods sold by an importer if tax at the import stage has been paid. The tax rate is doubled for persons (including PEs of nonresidents) not appearing in the ATL.
(d) This tax is a minimum tax for entities engaged in the trading of imported goods. The tax paid may be credited against the eventual tax liability of the taxpayer calculated at the corporate tax rate on total income relating to such imports if such tax liability is higher than the amount of tax paid at import stage. Lower rates may apply to importers or manufacturers of specific goods. The tax rate is doubled for persons not appearing in the ATL. The tax is an advance tax on imports of goods by industrial undertakings for their own use. The tax rate on such imports is 1% or 2%.
(e) The tax withheld is treated as a minimum tax if the tax liability computed on a bottom-line profit basis is less than the amount of the tax withheld.The tax rate is doubled for persons (including PEs of nonresidents) not appearing in the ATL.
(f) The tax withheld is treated as a minimum tax if the tax liability computed on a bottom-line profit basis is less than the amount of the tax withheld. Specified services sectors include transportation services, freight forwarding services, air cargo services, courier services, manpower outsourcing services, hotel services, security guard services, software development services, information technology services and information technology-enabled services, tracking services, advertising services (other than print and electronic media), share registrar services, engineering services, car rental services, building maintenance services, services rendered by Pakistan Stock Exchange Limited and Pakistan Mercantile Exchange Limited, inspection, certification, testing, training, warehousing services, services rendered by asset management companies, data services provided under a license issued by the Pakistan Telecommunication Authority, telecommunication infrastructure (tower) services, oilfield services, telecommunication services, collateral management services, travel and tour services, REIT management services, services rendered by NCCPL, subject to fulfillment to certain conditions. The tax rate is doubled for persons not appearing in the ATL.
(g) This tax is imposed on residents and nonresidents.
(h) The applicable rate depends on the income earned by the employee for the year.
(i) The tax is collected by manufacturers and commercial importers at the time of the sale of goods in specified sectors. The tax collected is an advance tax for distributors, dealers and wholesalers. The 0.1% rate applies to sales of goods other than fertilizers. The 0.7% rate applies to fertilizer sales. The rate for fertilizers is 0.25% for persons appearing in the ATLs for both income tax and sales tax. The tax rate is doubled for persons not appearing in the ATL.
(j) A person responsible for registering or attesting the transfer of immovable property must collect the tax from the person selling or transferring the property (other than certain persons specified as exempt). The tax collected is an advance tax. A 2% rate applies to the gross amount of consideration received on the sale of property. The tax rate is doubled for persons not appearing in the ATL.
(k) The tax is collected by manufacturers, distributors, dealers, wholesalers or commercial importers at the time of the sale of goods in specified sectors to retailers. The tax collected may be credited against the eventual tax liability. The tax rate is doubled for persons not appearing in the ATL.
(l) This advance tax is collected by the motor vehicle registration authorities at the time of registration of the vehicle. The rates vary according to the engine capacity of the relevant motor vehicles. The tax rate is doubled for persons not appearing in the ATL.
(m) This advance tax is collected by electric companies at the time of issuance of invoices to consumers. Progressive rates ranging from 0% to 12% applies to industrial and commercial consumers.
(n) Specified persons making sales through public auction or auction by tender are required to collect advance tax at a rate of 5% on immovable property and 10% on goods. Tax collected on leases of the right to collect tolls is a final tax. The tax rate is doubled for persons not appearing in the ATL.
company to the effect that such provisions are based on and are in line with the Prudential Regulations issued by the State Bank of Pakistan. The amount in a provision in excess of the allowable percentage may be carried over to succeeding years.
Tax depreciation. Depreciation recorded in the financial statements is not allowed for tax purposes. Tax depreciation allowances are given on assets, such as buildings, plant and machinery, computers and furniture owned by the company and used for business purposes.
Depreciation is calculated using the declining-balance method. The following depreciation rates are generally used.
Computer hardware including printers, machinery and equipment used in the manufacturing of information technology products, aircraft and aero engines
Below-ground installations (including offshore) of mineral oil enterprises
and
To promote industrial development in Pakistan, certain other allowances relating to capital expenditure have been introduced. These allowances are summarized below.
Initial allowance. An initial depreciation allowance is available at a rate of 25% for plant and machinery placed in service in Pakistan. The allowance is granted in the tax year in which the assets are first placed in service in Pakistan and used in the taxpayer’s business for the first time, or in the tax year in which commercial production begins, whichever is later.
A first-year depreciation allowance at a rate of 90% is granted for plant machinery and equipment installed for generation of alternate energy. This allowance is available to an industrial undertaking set up anywhere in Pakistan and owned and managed by a company. The allowance is granted instead of the initial allowance.
Amortization of intangibles. Amortization of intangibles is allowed over the normal useful life of intangibles. If an intangible does not have an ascertainable useful life, for purposes of calculating annual amortization, the normal useful life is considered to be 25 years for the purposes of calculating amortization.
Amortization of expenses incurred before the commencement of business. The amortization of expenses incurred before the commencement of business is allowed on a straight-line basis at an annual rate of 20%.
Relief for losses. Business losses, other than capital losses and losses arising out of speculative transactions, may be carried forward to offset profit in subsequent years for a period not exceeding six years. Unabsorbed depreciation may be carried forward indefinitely.
The 2018 Finance Act restricted offsetting of prior year losses representing depreciation and amortization to the extent of 50% of the balance income for the year after adjustment of business loss, if any. However, such loss is offset against 100% of such balance income if the taxable income for the year is less than PKR10 million.
Foreign losses can only offset foreign-source income and may be carried forward for a period not exceeding six years.
Groups of companies. A group of companies comprising holding companies and subsidiaries in a 100%-owned group can file its tax returns as one fiscal unit, subject to the satisfaction of certain conditions.
In addition, on the satisfaction of certain conditions, group companies can surrender their assessed losses (excluding capital losses and losses brought forward) for the tax year to other group companies. The amount of loss to be surrendered is calculated in the ratio of the percentage of shareholding of the holding company in the subsidiary company.
The option of group taxation is available to group companies that comply with the corporate governance requirement and group designation rules or regulations, as specified by the Securities and Exchange Commission of Pakistan.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax
Sales tax, on the supply of goods, on the cost of imported goods and on certain services; certain items and classes of persons are exempt Various Excise duties, on specified goods imported or manufactured in Pakistan and on specified services provided or rendered in Pakistan (the government may declare any goods or services or class of goods or services exempt) Various State and local taxes; an annual trade tax on companies, including branches of foreign companies Various
Net assets tax (zakat, a religious levy), on certain assets of companies having a majority of Muslim shareholders who are citizens of Pakistan
2.5
Social security contributions, on salaries of employees (maximum of PKR1,800 per month) 6 Employees’ old-age benefits; based on minimum wages of employees under law of PKR25,000 per month; payable by
(a) Treaty-determined percentage holding required.
(b) Interest paid to the government or, in certain circumstances, to a financial institution owned or controlled by the government is exempt.
(c) Fifteen percent for industrial, commercial or scientific know-how.
(d) Treaty-determined percentage holding required, and payer must be engaged in an industrial undertaking; otherwise, higher rate or normal rate applies.
(e) Royalties are exempt from withholding tax to the extent they represent a fair and reasonable consideration.
(f) Certain approved loans are exempt.
(g) Normal rates apply.
(h) Treaty-determined percentage holding by a public company required and the profits out of which the dividends are paid must be derived from an industrial undertaking; otherwise, normal rates apply.
(i) Ten percent if the recipient is a financial institution.
(j) Lower amount for literary, artistic or scientific royalties.
(k) Fifteen percent if payer is an enterprise engaged in preferred activities.
(l) Rate reduced to 10% if recipient is a bank or financial institution or if certain types of contracts apply. Rate reduced to 15% if recipient holds 25% of the capital of the paying company.
(m) Copyright royalties and other similar payments for literary, dramatic, musical or artistic work are exempt.
(n) Fifteen percent if the recipient is a company. Further reduced to 10% if the treaty-determined percentage is held by the recipient and the industrial undertaking is set up in Pakistan after 8 December 1987. Twenty percent in other cases.
(o) Lower rate applies if the recipient is a company that controls, directly or indirectly, 10% of the voting power in the company paying the dividend.
(p) Lower rate applies if recipient is a company that owns directly at least 25% of the capital of the paying company.
(q) The 15% rate applies to dividends paid to companies. The 30% rate applies to other dividends.
(r) The 15% rate applies if the recipient is a company that owns directly at least 25% of the capital of the payer and is engaged in an industrial undertaking.
(s) The 12% rate applies if the recipient is a company that owns directly at least 25% of the capital of the payer; the 15% rate applies to dividends paid to other companies; and the 20% rate applies to other dividends.
(t) Interest paid to the government or to an agency of or an instrumentality owned by the government is exempt from tax.
(u) The 10% rate applies if the payer is engaged in an industrial undertaking and if the recipient is a company; the 12.5% rate applies if the recipient is a company; the 15% rate applies in all other cases.
(v) The lower rate applies if the beneficial owner of the dividends is a company that owns at least 20% of the shares of the payer.
(w) The 10% rate applies to royalties for cinematographic films and to tapes for television or radio broadcasting. The 15% rate applies to royalties for literary, artistic or scientific works.
(x) The treaty rate applies to the extent the amount represents a fair and reasonable consideration.
(y) Interest paid to the government or to the central bank is exempt.
(z) For details regarding these rates, please see the relevant footnotes in Section A.
Pakistan has also entered into treaties that cover only shipping and air transport. These treaties are not included in the above table.