Taxation Law in Pakistan

There are tax consequences related to virtually every business decision made today. This can be extremely confusing for anyone not in the legal business and you deserve the most practical, tuned-in and well-crafted tax solutions. At Josh and Mak International we provide a comprehensive range of services from the completion of tax returns under corporation tax and self assessment to complex consultancy assignments and strategic tax planning. Our ability to focus on our clients and deliver innovative tax solutions is enhanced by our knowledge of specific business environments including financial services, leisure, retail, sport, high growth companies, manufacturing and automotive, technology and communications, public sector, property and utilities. We also have a number of specialist tax groups who deal with specific complex areas of tax law.

Our consultants can help you plan, grow and structure your business. We are known for our straightforward approach to solving our clients’ most complex business challenges. We work hand-in-hand with clients to improve business performance, drive shareholder value and create competitive advantage.

The following are just some of the services we offer at Josh and Mak:

• Corporate and individual tax planning including trusts, cooperative societies and NGOs

• Compliance services including preparation of income tax and sales tax returns and customs clearance

• Representing clients before tax authorities and assisting in preparing appeals for tribunals, high courts and supreme court

• International tax consultancy including tax on international transactions and advising on double taxation treaties

• Assisting with sales tax matters including registration, de-registration and assessment

• Obtaining Advance Ruling on proposed investments or business transactions

• Establishing gratuity funds, provident funds and other employees benefit schemes and their approval from tax authorities

• Providing general tax advice based on current and evolving laws and rulings

Legal Services in Pakistan

Taxation System

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

Direct Taxes

Direct taxes primarily comprises of income tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following categories:

• Salaries

• Interest on Securities

• Income from Property

• Income from Business or Profession

• Capital Gains

• Income from Other Sources

Personal Tax

All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates ranging from 10 to 35 per cent.

Tax on Companies

All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 35%. However, the effective rate is likely to differ on account of allowances and exemptions related to industry, location, exports, etc.

Inter-Corporate Dividend Tax

Tax on the dividends received by a public company from a Pakistan company is payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inter-corporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e. 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to a withholding tax of 10% which is treated as a full and final discharge of tax liability in respect of this source of income.

Treatment of Dividend Income

Dividend income received as below enjoys tax exemption, provided it does not exceed Rs. 10,000/-.

• Dividend received by non-resident from the state enterprises Mutual Fund set up by the Investment Corporation of Pakistan.

• Dividends received from a domestic company from an income earned abroad provided it is exclusively engaged overseas in accordance with an agreement approved by the Central Board of Revenue.

Unilateral Relief

A person resident in Pakistan is entitled to tax relief 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.

Customs

Goods imported and exported from Pakistan are liable to rates of Customs duties as described in the Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. 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.

Federal Excise Taxes

Federal Excise duties are payable on a limited number of goods produced or manufactured, and services provided or rendered in Pakistan. On most of these items federal excise duty is charged on the basis of value or retail price. Some items are, however, chargeable on the basis of weight or quantity. Classification of goods is done in accordance with the harmonized commodity description and coding system which is being used all over the world. All exports are exempt from federal excise duty.

Sales Tax

An application in the shape of the STR-1 form should be submitted to the CRO, Central Registration Office, electronically or through registered mail or courier services for registration under Sales Tax Rules, 2006, Chapter I “Registration, compulsory Registration and De-Registration”.

A registered person is restricted to claim an adjustment of input tax to the extent of ninety percent of output tax for that tax period. Further, it permits the adjustment of input charged in acquisition of fixed assets in twelve equal monthly installments after the start of production of a new unit. The board is empowered to exclude any person from the above purview.

Time of Supply

Sales Tax used to become payable at the time of delivery of such goods or when any payment is received by the supplier in respect of such a supply. It has now been restricted only to the time of delivery of goods by the supplier irrespective of the actual time of payment. There have been several newly inserted subsections into this rule in recent times, please contact us for the latest up to date information to ensure you are operating within the taxation laws.

Default Surcharge

Those who fail to pay what is due when its due are liable for the following default surcharges;

• For first six months 1% per month

• For subsequent period till the final payment 1.5% per month

• In case of tax fraud till the final payment 2% per month

Offenses and Penalties

These are payable on a sliding scale depending on the offense, of which each carries its own financial penalty. You really don’t want to fall foul of the law and end up paying any of these hefty fines, or even a prison sentence for the most serious offenses, so contact Josh and Mak today to make sure you don’t suffer a financial hit for not knowing the rules.

Sales Tax is levied at various stages of economic activity at the rate of 15 per cent 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 up to a 90% adjustment and a registered person can make this adjustment of tax paid at earlier stages against the tax payable by him on his supplies. The tax paid at any stage does not exceed 15% of the total sales price of the supplies.

Why you should hire Josh and Mak to perform a high quality audit for your business

In today’s ever changing global economy, businesses need trusted advisers. Our audit specialists at Josh and Mak International go that extra mile to not only understand your business but also the industry in which you operate, whether it is in Pakistan and/or abroad.

Our audit approach focuses on understanding the clients’ business and control issues from the inside out. It combines a rigorous risk assessment, diagnostic processes, and audit testing procedures as well as a continuous assessment of our clients’ service performance. Our state of the art, audit tool supports all phases of the audit process including planning, executing, reporting.

Investment Advisory Services

All investment carries some element of risk and thus need careful analysis and expert advice. The key to becoming a successful investor is to achieve appropriate risk/return trade off through the identification of risks that exist and their proactive management.

Our Investment Advisory Service professionals specialize in identifying those risks arising from regulation, competition and macro economic forces and designing strategies to manage it to your advantage. Our range of services includes:

• Advice on analyzing investment prospects and mode of doing business in Pakistan including advising on the form of legal entity, incorporation, obtaining of necessary permissions and help in dealing with local regulators

• Identification of suitable business partners and conducting due diligence

• Feasibility studies including preparation of projected financial statements and projects

• Appraisal through NPV, IRR, Payback and DCF analysis including cost assessment and revenue projections

• Sensitivity analysis

• Tariff and pricing studies

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