At Josh and Mak International, we specialize in providing legal advice on taxation matters in the power, mining, and energy sectors. Our expert team regularly assists companies operating in these industries by offering comprehensive guidance on various tax-related issues. By navigating the complexities of Pakistan’s taxation laws, we help our clients maximize efficiency, ensure compliance, and optimize their tax positions.
Sales Tax: Sales tax, also known as Value Added Tax (VAT) in many jurisdictions, is governed by the Sales Tax Act 1990 in Pakistan. All supplies made in the course of taxable activities and imported goods are subject to sales tax, with certain exceptions listed in Schedule 6 of the Sales Tax Act. It is important for exploration and production (E&P) companies to be registered under the Sales Tax Act, as the supply of E&P products attracts sales tax. Our team can provide guidance on sales tax registration, compliance requirements, and the implications of sales tax on E&P activities.
Import Duties: Customs duty on the import of plant, machinery, equipment, and other accessories used by E&P companies, their contractors, subcontractors, and service companies is governed by SRO.678 (1)/2004 dated 7 August 2004 (SRO), issued under Section 19 of the Customs Act. We can assist in understanding and leveraging the exemptions and concessions available for E&P companies. This includes exemptions from customs duty for machinery, equipment, materials, specialized vehicles or vessels, pickups (four-wheel drive), helicopters, aircraft, accessories, spares, chemicals, and consumables that are not locally manufactured. These concessions are applicable to goods imported by E&P companies and their associated entities, subject to certain conditions specified in the notification. Our team can provide detailed advice on eligibility, compliance, and the documentation required to benefit from these exemptions.
Federal Excise Duty on Minerals/Related Products: Excise duty is a single-stage duty levied on specified goods produced or manufactured in Pakistan, imported into Pakistan, produced or manufactured in non-tariff areas and brought to tariff areas for sale or consumption, as well as on specified services provided or rendered in Pakistan. We can guide companies operating in the mining sector on matters related to federal excise duty, including compliance, applicable rates, and reporting requirements.
Stamp Duty: Stamp duty is levied on written deeds, wills, or other formal legal documents for the transfer of property or mine leases, among other transactions. Our team can provide advice on stamp duty requirements, applicable rates, and the proper execution of documents to ensure compliance and avoid any potential disputes.
Comprehensive Tax Services: Our expertise extends beyond specific tax matters. We offer a range of services to our corporate clients, including tax planning, supervision of books of accounts, preparation and submission of sales tax returns, income tax returns, and statements. We also provide representation for tax assessments before taxation authorities, appearances before appellate forums, and assistance with NTN (National Tax Number) registration and sales tax registration. Our aim is to ensure that our clients’ businesses are tax-efficient and fully compliant with tax regulations.
Navigating the complex taxation landscape in the energy and mining sectors is crucial for companies to optimize their operations. At Josh and Mak International, we provide specialized legal advice on taxation matters, assisting our clients in maximizing efficiency, ensuring compliance, and minimizing tax liabilities. Our experienced team is well-versed in the intricacies of Pakistani tax laws and regulations, enabling us to deliver tailored solutions that meet our clients’ specific needs. Contact us today to benefit from our expertise and achieve your taxation goals in the energy and mining sector.
The mineral sector in Pakistan is subject to a comprehensive tax and levy regime designed to regulate and promote sustainable mining practices while ensuring fair revenue generation for the government. This article provides an in-depth overview of the various taxes and levies applicable to the mineral sector, including corporate taxes, withholding taxes, sales tax, and other levies. Additionally, we discuss concessions available for imports related to mining operations.
Income Tax
1.1 Rate of Corporate Tax
The Government of Pakistan has embarked on a progressive reduction in the effective rate of corporate tax. The applicable rate of tax, as regulated under the Income Tax Ordinance, 2001, is currently 35% for companies.
1.2 Minimum Corporate Tax
Resident companies are required to pay a minimum corporate tax annually at the rate of 1.0% of the declared turnover. However, if the corporate tax payable exceeds this amount in any year, the minimum tax is not charged.
1.3 Exemption from Taxation on Refining or Concentration of Mineral Deposits
Profits derived from refining or concentrating mineral deposits are exempt from taxation at the rate and for the period prescribed under tax laws.
1.4 Pre-commencement Expenditure
Expenditure incurred before the commencement of business, including feasibility studies, is allowed to be amortized on a straight-line basis at specified rates.
1.5 Development Expenditure Deduction and Loss Carry Forward
Expenditure incurred on exploration operations qualifies for immediate deduction in the determination of taxable income. Project development expenditure is deductible at a rate of 25% per annum, aligned with international practice. Depletion allowances are provided as per current tax laws.
1.6 Ring-Fencing
A mining company will be assessed for income tax on the entirety of its mining operations in Pakistan.
Withholding Taxes
2.1 Dividends
Withholding tax on dividends paid is levied at 10%, except where lower rates are specified in the Avoidance of Double Taxation Treaty with the recipient’s country.
2.2 Non-Resident Contractors
Payments made to non-resident contractors are subject to a withholding tax of 6%, applicable to the execution of contracts or sub-contracts under construction, assembly, or installation projects in Pakistan. This tax is final if the contractor opts under clause (4) of Part-IV of the Second Schedule to the Income Tax Ordinance, 2001.
2.3 Interest
Interest paid to non-residents on approved loans is exempt from withholding tax.
2.4 Royalty & Fee for Technical Services
A tax of 15% is deducted from the gross amount paid to non-residents for royalty and technical services.
Other Taxes
3.1 Sales Tax
Mining companies are liable to pay general sales tax at the rate prescribed by the Government, which is subject to periodic updates.
3.2 Additional Profits Tax (APT)
Large-scale mining companies must pay an Additional Profits Tax based on agreed economic projections in their agreements with the Government. This tax follows a three-tier mechanism, payable only when the project achieves an agreed threshold of profitability.
Other Levies
4.1 Zakat
Zakat, at 2.5% of the asset value, is withheld from every Muslim citizen of Pakistan who qualifies as ‘sahib-i-nisab’ on the first day of Ramadan. Non-Muslims and non-resident shareholders are exempt from Zakat on dividends.
4.2 Workers Profit Participation Fund (WPPF)
A levy is payable to the Trustees of WPPF at an agreed percentage of net profits by companies and associations of persons with more than 20 members, engaged in industrial undertakings, employing 50 or more persons, and having paid-up capital or fixed assets exceeding specified thresholds.
4.3 Workers Welfare Fund (WWF)
Companies engaged in industrial undertakings must pay a levy at an agreed percentage of taxable income if the income exceeds Rs. 500,000.
4.4 Workers Children Education Cess
This provincial levy is payable quarterly by establishments employing 20 or more workers at Rs. 25 per worker per quarter, unless the employer has made educational arrangements for the workers’ children.
4.5 Employees’ Social Security Contribution
Employers with ten or more workers earning up to Rs. 7,000 per month must pay Rs. 370 per wage earner per month, including Rs. 20 contributed by the wage earner, to the Employees’ Social Security Institution.
4.6 Employees’ Old-Age Benefits
Employers with ten or more employees must contribute 6% of their salary (up to a maximum of Rs. 210 per month) to the Employees’ Old Age Benefits Institution.
4.7 Excise Duty on Minerals
Dispatches of specified minerals from mines are subject to an excise duty/cess at notified rates, meant for labor welfare in the mining industry.
4.8 Surface Rent & Compensation
The Government ensures adequate access and freedom for mineral title holders to carry out their activities while ensuring fair compensation and surface rent to landowners as prescribed under mineral concession rules.
Concessions on Imports
5.1 For Mining Companies and Mineral-based Industry
No customs duty and sales tax are levied on the import of machinery, equipment, materials, specialized vehicles, accessories, spares, chemicals, and consumables meant for the mineral exploration phase. However, a 5% ad-valorem customs duty (with no sales tax) is applicable on machinery meant for mine construction or extraction, with deferred payment options.
5.2 For Local Manufacturers of Mining Machinery
To encourage local manufacturing, raw materials for mining machinery are subject to 10% customs duty with 15% sales tax, while components and machinery for mining operations attract a 10% customs duty with no sales tax.
Conclusion
The tax and levy regime in Pakistan’s mineral sector is designed to ensure fair revenue generation while promoting investment and sustainable development. For comprehensive legal advice and assistance in navigating the complexities of Pakistan’s tax and levy framework in the mineral sector, please contact Josh and Mak International.
Updated Article :
The mining sector in Pakistan is subject to various taxes and levies under the Income Tax Ordinance, 2001, and other applicable laws. The key taxes and levies applicable to the mining sector are as follows:
- Corporate Income Tax: Mining companies are liable to pay corporate income tax on their taxable income. The tax rate for companies may vary and is specified in the First Schedule of the Income Tax Ordinance.
- Royalties: Royalties are payments made to the government for the right to extract minerals. These are typically a percentage of the value of the minerals extracted. The specific rates and terms are usually outlined in the mining lease agreements or specific legislation governing the mineral resources.
- Withholding Taxes: Various types of withholding taxes are applicable to payments made by mining companies. These include taxes on payments to non-residents, contractors, and suppliers. For example, section 152 of the Income Tax Ordinance deals with withholding taxes on payments to non-residents.
- Advance Tax: Mining companies are also subject to advance tax payments on their expected income for the year. This is typically paid in quarterly installments. Section 147 of the Income Tax Ordinance outlines the provisions for advance tax.
- Sales Tax and Federal Excise Duty: Mining companies may be subject to sales tax and federal excise duty on the supply of goods and services. The rates and applicability are governed by the Sales Tax Act, 1990, and the Federal Excise Act, 2005.
- Customs Duties: Import of machinery, equipment, and other goods necessary for mining operations may attract customs duties. However, there are provisions for exemptions and concessions under various notifications and schedules of the Customs Act, 1969.
- Workers’ Welfare Fund (WWF) and Workers’ Participation Fund (WPF): Companies are required to contribute to these funds, which are used for the welfare of workers. Sections 60A and 60B of the Income Tax Ordinance provide for the deductibility of these contributions.
- Super Tax: In certain cases, mining companies may also be subject to super tax, which is an additional tax on high-income earners. The applicable rates and conditions are specified in section 4B of the Income Tax Ordinance.
- Capital Gains Tax: If a mining company disposes of its assets, it may be subject to capital gains tax. The rules for computing capital gains are provided in Part V of Chapter III of the Income Tax Ordinance.
These taxes and levies are part of the broader fiscal regime governing the mining sector, designed to ensure that the sector contributes to national revenue while providing incentives for investment and growth. The specific details, rates, and conditions are subject to change based on amendments to the legislation and the Finance Acts passed annually.
TAXES AND LEVIES APPLICABLE TO MINERAL SECTOR (as per National Mineral Policy of Pakistan 2013)
1. Income Tax
1.1 Rate of Corporate Tax
The Government embarked upon a progressive reduction in the effective rate of corporate tax. The applicable rate of tax as regulated under the Income Tax Ordinance, 2001, is 35% for companies.
1.2 Minimum Corporate Tax
A minimum amount of corporate tax is payable annually at the rate of 1.0% of the declared turnover by resident companies. However, where the corporate tax payable exceeds this amount in any year, the minimum tax is not charged.
1.3 Exemption from taxation on refining or concentration of mineral deposits:
Exemption from taxation on profits from refining or concentrating mineral deposits is also allowed at the rate and for the period prescribed under tax laws.
1.4 Pre-commencement expenditure
Expenditure incurred before commencement of business including feasibility studies etc., is also allowed to be amortized on a straight line basis at the specified rates.
1.5 Development Expenditure Deduction and Loss Carry Forward
Expenditure incurred on exploration operations qualifies for immediate deduction in the determination of taxable income. Expenditure incurred for project development operations will be allowed deduction at a rate of 25% per annum, in line with international practice. However, the depletion allowance will be allowed as per provision of current tax laws.
1.6 Ring-Fencing
A mining company will be assessed for income tax on the entirety of its mining operations in Pakistan.
2. Withholding Taxes 2.1 Dividends
Except where lower rates are specified in the Avoidance of Double Taxation Treaty with the country of the recipient, the withholding tax levied on dividends paid is 10%.
2.2 Non-Resident Contractors
The rate of withholding tax is 6% on payments made either in full or part to a non-resident on the execution of a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project.
The tax collected shall be a final tax if the contractor furnishes on option under clause (4) of the Part-IV of the Second Schedule to the Income Tax Ordinance, 2001.
2.3 Interest
Interest paid to non-residents in respect of availed approved loans is exempt from withholding tax.
2.4 Royalty & Fee for Technical Services
Tax @ 15% shall be deducted from the gross amount paid to a non-resident person on account of royalty and fee for technical services.
3. Other Taxes 3.1 Sales Tax
Mining companies shall be liable to pay general sales tax at the rate prescribed by the Government from time to time.
3.2 Additional Profits Tax (APT)
An Additional Profits Tax is payable by large scale mining companies at agreed rates based on the economic projections as stipulated in the agreement with the Government.
The APT will be determined based on a three-tier mechanism and will be payable only when the mining project achieves the agreed threshold level of profitability. The three-tier mechanism is summarized below:-
Rate of Return (ROR) Threshold
15% 20% 25%
Resource Rent Tax (RRT) Rate
10% 15% 18%
APT will only be paid if the mining project earns an after-tax real (i.e. inflation – adjusted) rate of return of 15%. The second and third tiers of RRT become payable once the profitability levels exceed 20% and 25% respectively.
4. Other Levies
4.1 Zakat
Zakat is withheld from every Muslim who is not only a citizen of Pakistan but also ‘sahib-i-nisab’, at 2.5% of the value of the assets held on the first day of the month of Ramadan.Non-Muslims and non-resident shareholders of a company are exempt from the requirement to pay Zakat on dividends.
4.2 Workers Profit Participation Fund (WPPF)
A levy is payable to the Trustees of WPPF at an agreed percentage of net profits as per accounts for the year by companies and associations of persons with more than 20 members (partners) engaged in industrial undertaking, and employing 50 persons or more, whose paid-up capital is Rs2.00 million or more and/or the fixed assets are Rs4.00 million or more.
4.3 Workers Welfare Fund (WWF)
A levy is payable by companies engaged in industrial undertaking at an agreed percentage of the taxable income of the year where such income is Rs. 500,000 or more.
4.4 Workers Children Education Cess
This is a provincial levy payable in every quarter by an establishment employing 20 workers or more at Rs25 per worker per quarter, except in case the employer has made arrangements for the education of children of his/her workers or cess/excise duty is paid under the Excise Duty on Minerals (Labour Welfare) Act, 1967.
4.5 Employees’ Social Security Contribution
This is a provincial levy requiring every employer employing ten or more workers with wages up to Rs7,000 per month to pay Rs370 per wage earner including Rs20 contributed by the wage earner per month to the Employees’ Social Security Institution while the workers and their family members are provided free medical treatment, maternity benefits and other assistance.
4.6 Employees’ Old-Age Benefits
Every employer employing ten or more persons is to contribute 6% of their salary up to a maximum of Rs210 per month to the Employees’ Old Age Benefits Institution in respect of each employee, including Rs30 per month contributed by such employee who will be entitled to old-age pension on attaining the age of 55 & 60 years in the case of women and men, respectively.
4.7 Excise Duty on Minerals:
All dispatches of specified minerals from mines are subject to levy of a cess/duty of excise at the notified rate from one to five rupee per ton, meant for financing measures for promoting the welfare of labour employed in the mining industry.
4.8 Surface Rent & Compensation
The respective Government will ensure adequate access and freedom to the mineral title holder to carry out the prospecting, exploration, exploitation and processing activities etc. while the mineral title holders will provide fair surface rent and compensation to the landowner as prescribed under the mineral concession rules.
5. Concessions on Imports
5.1 For Mining Companies and Mineral-based Industry
There is no customs duty and sales tax on the import of machinery, equipment, materials, specialized vehicles (4×4 non-luxury), accessories, spares, chemicals and consumables meant for mineral exploration phase. These concessions are applicable to Mineral Exploration and Extraction Companies or their authorized operators or contractors who hold permits, licenses, leases and who enter into agreements with the Government of Pakistan or Provincial Government, subject to the condition that imported goods shall not be sold or otherwise disposed of without prior approval of the Federal Board of Revenue and payment of customs duties and taxes levy-able at the time of import.
However, customs duty at the rate of 5% ad-valorem with no sales tax is payable on import of such machinery meant for the mine construction phase or extraction phase, with the added advantage of entitlement for deferred payment of duty for a period of five years subject to 6% surcharge per annum.
