Taxation Law Services in Pakistan

At Josh and Mak International, we recognise the intricate tax implications associated with every business decision. We are committed to offering practical, tailored, and expertly crafted tax solutions to address these complexities. Our services range from the completion of tax returns under corporation tax and self-assessment to handling complex consultancy assignments and strategic tax planning. Our proficiency is further enhanced by our deep understanding of various business sectors, including financial services, leisure, retail, sports, high-growth companies, manufacturing and automotive, technology and communications, public sector, property, and utilities. We also boast specialist tax groups that focus on particularly intricate areas of tax law.

Our consultants are adept at assisting clients in planning, growing, and structuring their businesses. We are renowned for our straightforward approach to solving the most complex business challenges, working collaboratively with clients to enhance business performance, drive shareholder value, and create competitive advantages.

Our extensive suite of services includes:

• Corporate and Individual Tax Planning: This encompasses trusts, cooperative societies, and NGOs, ensuring optimal tax strategies tailored to each client’s needs.
• Compliance Services: We manage the preparation of income tax and sales tax returns and handle customs clearance, ensuring all filings are accurate and timely.
• Representation Before Tax Authorities: Our experts represent clients before tax authorities and assist in preparing appeals for tribunals, high courts, and the Supreme Court, providing robust defence and advocacy.
• International Tax Consultancy: We advise on tax issues related to international transactions and double taxation treaties, helping clients navigate the complexities of cross-border tax matters.
• Sales Tax Assistance: This includes registration, de-registration, and assessment for sales tax, ensuring compliance with all relevant regulations.
• Advance Ruling Procurement: We assist clients in obtaining Advance Rulings on proposed investments or business transactions, providing clarity and certainty for future operations.
• Establishment of Employee Benefit Schemes: We aid in setting up gratuity funds, provident funds, and other employee benefit schemes and secure their approval from tax authorities.
• General Tax Advice: We provide ongoing advice based on current and evolving laws and rulings, ensuring clients remain compliant and strategically positioned.

Based on the Income Tax Ordinance, 2001 of Pakistan, the list of taxes in Pakistan includes the following:

1. Tax on Taxable Income:
   • Individuals, Association of Persons (AOPs), and Companies are subject to varying tax rates based on their income brackets. For individuals and AOPs, the tax rates range from 0% for income not exceeding Rs. 400,000 to 35% for income exceeding Rs. 12,000,000 .
2. Tax on Dividends:
   • The rate of tax imposed on dividends received from a company is structured as follows:
     • 7.5% for dividends paid by Independent Power Producers.
     • 15% for other cases.
     • Specific rates for mutual funds and REIT schemes .
3. Tax on Profit on Debt:
   • For profit on debt received, the tax rate is set at 15% of the yield or profit. Different rates apply based on the amount and type of debt instrument .
4. Tax on Builders:
   • A tax is imposed on the profits and gains from the business of construction and sale of residential, commercial, or other buildings, computed by the area of the building .
5. Tax on Developers:
   • A similar tax is imposed on the profits and gains from the business of development and sale of residential, commercial, or other plots. This is also computed based on the area of the plots for sale .
6. Super Tax:
   • A super tax is levied on high-earning individuals and entities, ranging from 1% to 4% based on their income brackets. For specific industries, the rate can go up to 10% .
7. Tax on Shipping or Air Transport Income of Non-residents:
   • Shipping income of a non-resident person is taxed at 8% of the gross amount received or receivable .
8. Tax on Royalty and Fees for Technical Services:
   • Payments to non-residents for royalty or technical services are subject to a 15% tax on the gross amount paid .
9. Tax on Brokerage and Commission:
   • A tax is imposed on brokerage and commission payments, with rates specified under different categories of services and income levels .
10. Advance Tax on Transactions:
    • Various advance taxes are imposed on transactions including the sale of property, cash withdrawals, motor vehicles, and certain luxury goods and services .
11. Tax on Undistributed Profits:
    • Public companies not distributing a specified percentage of their profits within a given timeframe are subject to a tax on undistributed profits at the rate of 5% of their accounting profit before tax .
12. Tax on Capital Gains:
    • Capital gains on the disposal of securities and immovable property are subject to tax at rates ranging from 5% to 20% based on the amount of gain and holding period .
13. Special Provisions for Certain Sectors:
    • Specific tax provisions apply to industries such as insurance, banking, oil and natural gas, and mineral deposits. These provisions outline the applicable tax rates and special conditions for these sectors .
14. Withholding Taxes:
    • Various withholding taxes apply to payments such as salaries, dividends, interest, royalties, fees for technical services, and payments to non-residents, with rates specified in the relevant sections of the Ordinance .
15. Turnover Tax:
    • For certain entities, a turnover tax is imposed based on their gross turnover, particularly for businesses with low profit margins .
16. Tax Credits and Exemptions:
    • The Ordinance also provides for various tax credits and exemptions for specific investments, donations, and expenditures. These are designed to encourage certain economic activities and investments .

This list captures the broad spectrum of taxes outlined in the Income Tax Ordinance, 2001, encompassing direct taxes on income, indirect taxes on transactions, and special provisions for various sectors and activities within Pakistan’s taxation framework.

Taxation System in Pakistan

Federal taxes in Pakistan, like most taxation systems globally, are classified into direct and indirect taxes. Direct taxes primarily include income tax, with income classified under salaries, interest on securities, income from property, business or profession income, capital gains, and income from other sources. Personal tax rates range from 10 to 35 per cent for individuals, unregistered firms, and associations of persons. Companies are taxed at a corporate rate of 35%, with allowances and exemptions affecting the effective rate.

The taxation of dividends varies, with inter-corporate dividends subject to differing rates depending on the recipient’s status and the nature of the distributing company. Dividends paid to non-company shareholders are subject to a 10% withholding tax, treated as a full discharge of tax liability for this income source. Unilateral relief is available for residents on income earned abroad and taxed outside Pakistan, with relief calculated based on the lower average tax rate.

Goods imported and exported from Pakistan are subject to customs duties as described in the Pakistan Customs Tariff. These duties account for about 37% of total tax receipts, with rates structured to favour industrial plants, machinery, and raw materials over consumer goods. Federal excise duties apply to certain goods and services produced or rendered in Pakistan, with exports exempt from these duties.

Sales tax in Pakistan is levied at 15% on goods imported into the country and on supplies made within the country by registered persons. The tax is payable at the time of goods delivery, with adjustments allowed for input tax up to 90% of the output tax. Non-compliance with tax obligations results in default surcharges and penalties, which can be severe, including financial fines and potential prison sentences.

The latest updates in taxation for 2024 include significant reforms aimed at enhancing the progressive nature of the tax system and encouraging compliance. Notably, higher tax slabs have been introduced for high-income earners, new taxes on cash withdrawals for non-filers, and increased withholding tax rates on international transactions , Additionally, specific exemptions and reliefs have been granted to encourage investment from overseas Pakistanis and support the growth of the IT sector

At Josh and Mak International, our audit services are designed to provide trusted advisory support in today’s dynamic global economy. Our audit approach involves a thorough understanding of our clients’ businesses and industry contexts, combining rigorous risk assessment, diagnostic processes, and continuous service performance evaluation. Our state-of-the-art audit tools support all phases of the audit process, ensuring a high-quality and comprehensive audit service.

Furthermore, our investment advisory services help clients navigate the complexities of investment decisions. Our professionals specialise in identifying and managing risks arising from regulation, competition, and macroeconomic forces. We offer services ranging from investment prospect analysis to due diligence, feasibility studies, and sensitivity analysis, ensuring our clients achieve a favourable risk/return trade-off.

In summary, Josh and Mak International provides a robust suite of taxation law services designed to meet the diverse needs of our clients. We offer expert advice and representation in all aspects of tax law, delivering innovative solutions that enhance business performance and create competitive advantages, ensuring compliance and strategic success in a complex and ever-changing tax landscape.

Income Tax Basics: Frequently Asked Questions

Q: What is taxable income?

A: Taxable income is the total income reduced by donations that qualify for direct deductions and certain deductible allowances. This is the amount on which tax is calculated after allowable deductions have been made.

Q: How is total income defined?

A: Total income is the aggregate of income chargeable to tax under each head of income. It represents the sum of all income streams before any deductions.

Q: What are the heads of income under the Income Tax Ordinance, 2001?

A: The Income Tax Ordinance, 2001 divides all income into the following five heads:

1. Salary
2. Income from property
3. Income from business
4. Capital gains
5. Income from other sources

Q: How is residency determined for tax purposes?

A: An individual is considered a resident for a tax year if they meet any of the following conditions:

• Present in Pakistan for a period or periods totaling 183 days or more in the tax year.
• Present in Pakistan for a period or periods totaling 120 days or more in the tax year and 365 days or more in the four years preceding the tax year.
• An employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.

An Association of Persons (AOP) is resident if its control and management are situated wholly or partly in Pakistan at any time during the year. A company is resident if it is incorporated or formed under any law in Pakistan, its control and management are wholly in Pakistan at any time during the year, or if it is a provincial or local government entity in Pakistan.

Q: What qualifies as non-resident status for tax purposes?

A: An individual, AOP, or company is considered non-resident if they do not meet the criteria for residency as outlined above.

Q: What is Pakistan source income?

A: Pakistan source income, defined in section 101 of the Income Tax Ordinance, 2001, includes:

• Salary from employment exercised in Pakistan.
• Salary paid by the Pakistani government or local governments, wherever the employment is exercised.
• Dividends paid by resident companies.
• Profit on debt paid by a resident person.
• Property or rental income from leases of immovable property in Pakistan.
• Pensions or annuities paid by a resident or permanent establishment of a non-resident.

Q: What constitutes foreign source income?

A: Foreign source income is any income that does not fall under Pakistan source income. This generally includes income earned outside Pakistan.

Q: Who is considered a person under the Income Tax Ordinance, 2001?

A: A person includes:

• An individual.
• A company or association of persons incorporated, formed, organized, or established in Pakistan or elsewhere.
• The Federal Government, a foreign government, a political subdivision of a foreign government, or a public international organization.

Q: How is a company defined for tax purposes?

A: A company includes:

• Companies as defined in the Companies Ordinance, 1984.
• Bodies corporate formed under any law in Pakistan.
• Modarabas and bodies incorporated under foreign laws.
• Cooperative societies, finance societies, and other societies.
• Non-profit organizations, trusts, and entities or bodies of persons established under any law.
• Foreign associations declared as companies by the Board.
• Provincial and local governments in Pakistan.
• Small companies.

Q: What is an association of persons (AOP)?

A: An AOP includes firms, Hindu undivided families, artificial juridical persons, and bodies of persons formed under foreign laws, but excludes companies.

Q: What is a tax year?

A: A tax year is a period of twelve months ending on 30th June, denoted by the calendar year in which it falls. For instance, the period from 1st July 2017 to 30th June 2018 is the tax year 2018.

Q: What is a special tax year?

A: A special tax year is any period of twelve months ending on a date other than 30th June, denoted by the calendar year relevant to the normal tax year in which the closing date falls. For example, the period from 1st January 2017 to 31st December 2017 is denoted by the calendar year 2018.

Recent developments in Pakistan’s tax law have introduced several significant reforms aimed at enhancing the efficiency and transparency of the tax system. The Tax Laws (Amendment) Act, 2024, has brought forth a transformative set of changes to address systemic inefficiencies and promote taxpayer confidence.

One of the key aspects of the 2024 amendments is the introduction of a dedicated ‘Director General Law’ position within the Federal Board of Revenue (FBR). This role is intended to expedite the resolution of tax litigation pending before the Commissioner Inland Revenue and Appellate Tribunals, ensuring timely disposal of cases. The period for filing appeals before the High Court has been reduced from ninety days to thirty days, and the jurisdiction of the Commissioner Appeal has been limited to cases where the value does not exceed Rs. 10 million

Moreover, the amendments mandate the Appellate Tribunal to decide appeals within 90 days of filing, promoting efficiency in the adjudication process. The scope of references to the High Court has been expanded to include decisions of the Commissioner (Appeals) and mixed questions of law and fact. This change is designed to enhance access to appellate remedies and ensure judicial oversight 

In the realm of sales tax, the amendments to the Sales Tax Act, 1990, have fortified alternative dispute resolution mechanisms and streamlined the adjudicative framework. Notably, appeals before the Commissioner (Appeals) are now restricted to cases with an assessment or refund value not exceeding Rs. 10 million, and the timeframe for filing appeals to the Appellate Tribunal has been reduced from sixty days to thirty days Additionally, the recent budget for 2023-2024 introduced several income tax reforms to enhance the progressive nature of the tax system and encourage compliance. New tax slabs for high-income earners have been introduced, and a 0.6% tax on cash withdrawals exceeding Rs. 50,000 per day has been implemented to incentivize tax filing. There is also a 10% tax on bonus shares for filers, and a higher rate of 20% for non-filers. The budget also includes measures to promote SME growth by raising the turnover limit for Small and Medium Enterprises (SMEs) and providing tax credits for property construction.

These reforms collectively aim to broaden the tax base, curb tax evasion, and ensure that the tax adjudication process is efficient and fair, contributing to Pakistan’s fiscal sustainability and regulatory excellence.

The Proposed Finance Act 2024

The Finance Act 2024 introduces a series of significant reforms aimed at enhancing the tax system in Pakistan. These reforms are designed to address existing inefficiencies, promote transparency, and ensure compliance, thereby boosting the overall fiscal framework of the country.

One of the major highlights of the Finance Act 2024 is the introduction of new tax slabs for high-income earners. Individuals earning above specific thresholds will now be subject to progressive tax rates, with the highest bracket facing rates of up to 10% for incomes exceeding PKR 500 million. This measure is aimed at ensuring a more equitable distribution of the tax burden (Federal Board of Revenue).

The Act also includes changes to the treatment of bonus shares, imposing a 10% tax on bonus shares for filers and a higher rate of 20% for non-filers. This is intended to increase revenue from capital gains and encourage compliance among shareholders .

Additionally, the Finance Act 2024 brings significant amendments to the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, the Federal Excise Act, 2005, and the Customs Act, 1969. For instance, the period for filing appeals before the High Court has been reduced from ninety days to thirty days, and the jurisdiction of the Commissioner Appeals has been limited to cases where the tax value does not exceed Rs. 10 million. These changes aim to expedite the adjudication process and reduce the backlog of pending cases (Federal Board of Revenue).

In terms of sales tax, the Act has introduced an 18% sales tax on previously zero-rated items such as milk and fat-filled milk. This change is expected to generate additional revenue but has also raised concerns among stakeholders about its impact on essential goods .

The government has also proposed measures to support the IT sector, including tax reliefs for IT exporters and a record budget allocation for the sector. However, there are concerns that some budgetary proposals from the IT industry have been overlooked.

Overall, the Finance Act 2024 represents a comprehensive effort to modernize Pakistan’s tax system, promote fairness, and enhance revenue collection. It reflects a balanced approach to addressing the country’s fiscal challenges while supporting economic growth and development.