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Pakistan

General Information

Country Name: Islamic Republic of Pakistan
Currency: Pakistani Rupee (PKR)
Primary Tax Authority: Federal Board of Revenue (FBR)

Key Legislation

  • Constitution of Pakistan: Establishes the legal framework for taxation and fiscal policies.
  • Income Tax Ordinance, 2001: Governs personal and corporate income tax.
  • Sales Tax Act, 1990: Regulates VAT and sales tax.
  • Customs Act, 1969: Governs customs duties on imports and exports.
  • Zakat and Ushr Ordinance, 1980: Regulates Zakat and agricultural land tax (Ushr).

Fiscal Authority Allocation

Pakistan has a centralized tax system, with the Federal Board of Revenue (FBR) responsible for most tax administration and collection.

Taxes Collected by Central Authorities:

  • Income tax (personal and corporate)
  • Sales tax (VAT)
  • Customs duties
  • Federal excise duties
  • Zakat

Taxes Collected by Local Authorities:

  • Property tax (administered by provincial authorities)
  • Some municipal taxes

Revenue Sharing Mechanisms:

Revenue from various taxes is collected centrally and then distributed among federal and provincial governments based on agreed formulas and revenue-sharing arrangements.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 29% (for tax year 2023-2024).
  • Taxable Income Definition: All worldwide income of resident corporations is subject to CIT. Non-resident companies are taxed on income sourced in Pakistan.
  • Deductible Expenses: Business-related expenses, including salaries, utilities, and cost of goods sold, are deductible. Certain expenses may be restricted.
  • Loss Carryforwards: Losses can be carried forward for up to 6 years.
  • Tax Incentives: Tax incentives for investment in specified sectors such as manufacturing, infrastructure, and technology.

Value-Added Tax (VAT)

  • Standard VAT Rate: 17% on most goods and services.
  • Reduced Rate: 0% for certain essential goods and exports.
  • Exemptions: Certain sectors such as healthcare, education, and financial services are exempt from VAT.
  • Refunds: VAT refunds are available for registered businesses, particularly exporters.

Personal Income Tax (PIT)

  • PIT Rates: Progressive rates from 0% to 35%. The top rate applies to income exceeding PKR 75,000,000 (for tax year 2023-2024).
  • Taxable Income Thresholds: Income below PKR 600,000 is tax-free (basic allowance for individuals).
  • Deductions and Exemptions: Various allowances and deductions are available, including for charitable donations, investment in retirement funds, and education expenses.
  • Treatment of Foreign Income: Residents are taxed on worldwide income. Tax credits or exemptions may apply under Double Tax Treaties (DTT).
  • Special Rules for Expatriates: Expatriates are taxed similarly to residents but may benefit from specific allowances or exemptions.

Additional Mandatory Contributions

Zakat Contributions:

  • Rate: 2.5% of net worth for Muslims (annual Zakat contribution).
  • Thresholds: Zakat applies to individuals and entities meeting the minimum threshold of net worth.

Social Security Contributions:

  • Rate: Contributions are made to the Employees’ Old-Age Benefits Institution (EOBI), covering pensions, disability, and survivors’ benefits.
  • Contribution Rate: Typically 5% of wages, with matching contributions by employers.

Withholding Taxes

  • Dividends: 15% withholding tax, which may be reduced under DTT.
  • Interest: 15% withholding tax, potentially reduced under DTT.
  • Royalties: 15% withholding tax, with reduced rates available under DTT.
  • Payments to Non-Residents: Generally subject to withholding tax, with reduced rates under DTT provisions.

Transfer Pricing Rules

Pakistan follows the OECD guidelines for transfer pricing. Companies must maintain documentation for related-party transactions and comply with the arm’s length principle.

Special Tax Regimes

  • Free Zones: Special economic zones and export processing zones offer various tax incentives, including exemptions from income tax and VAT.
  • Investment Incentives: Tax incentives available for investments in specific sectors, such as renewable energy and manufacturing.

Other Taxes

  • Property Tax: Levied by provincial authorities based on the value of real estate properties.
  • Federal Excise Duties: Applied to certain goods such as tobacco, alcohol, and petroleum products.

Double Taxation Agreements (DTAs)

Pakistan has signed 65 DTAs to avoid double taxation and provide reduced withholding tax rates on dividends, interest, and royalties.

Compliance and Reporting

  • Corporate Tax Filing Deadline: Annual corporate income tax returns must be filed within 6 months of the end of the financial year.
  • VAT Filing: Monthly VAT returns must be submitted by the 15th of the following month.
  • Penalties for Non-Compliance: Penalties for late filing and non-compliance include fines and interest on unpaid amounts.

Recent Developments

  • Tax Reforms: Pakistan has introduced various tax reforms to broaden the tax base and improve compliance, including enhanced digital reporting requirements.
  • Economic Challenges: Efforts are ongoing to stabilize the economy and attract foreign investment through tax incentives and streamlined processes.
  • Digital Taxation: Initiatives are being implemented to modernize tax administration and enhance digital tax compliance.

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