TAX STRUCTURE IN PAKISTAN
Taxation System
Federal taxes in Pakistan like most of the taxation systems in the world are
classified into two broad categories, viz., direct and indirect taxes. A broad
description regarding the nature of administration of these taxes is
explained below:
Direct Taxes
Direct taxes primarily comprise income tax, along with supplementary role
of wealth tax. For the purpose of the charge of tax and the computation of
total income, all income is classified under the following heads:
1. Salaries
2. Interest on securities;
3. Income from property;
4. Income from business or professions
5. Capital gains; and
6. Income from other sources.
Personal Tax
All individuals, unregistered firms, associations of persons, etc., are liable to
tax, at the rates rending 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 39%. 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. Inert-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 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/-.
1. Dividend received by non-resident from the state enterprises Mutual
Fund set by the Investment Corporation of Pakistan.
2. Dividends received from a domestic company out of income earned
abroad provided it is engaged abroad exclusively in rendering technical
services in accordance with an agreement approved by the Central Board of
Revenue.
Unilateral Relief
A person resident in Pakistan is entitled to a relief in tax 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.
Agreement for avoidance of double taxation
The Government of Pakistan has so far signed agreements to avoid double
taxation with 39 countries including almost all the developed countries of
the world. These agreements lay down the ceilings on tax rates applicable
to different types of income arising in Pakistan. They also lay down some
basic principles of taxation which cannot be modified unilaterally. The list of
countries with which Pakistan has concluded tax treaties is given below:
Austria Belgium Bangladesh Canada
China Denmark Egypt France
Finland Germany Greece India
Indonesia Iran Ireland Italy
Japan South Korea Lebanon Libya
Malta Mauritius Saudi Arabia Singapore
Poland Romania Switzerland Thailand
Sri Lanka Sweden Turkmenistan U.K.
Turkey Tunisia Kazakistan U.A.E.
U.S.A
Customs
Goods imported and exported from Pakistan are liable to rates of Customs
duties as prescribed in 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.
Central Excise
Central Excise duties are livable on a limited number of goods produced or
manufactured, and services provided or rendered in Pakistan. On most of
the items Central Excise duty is charged on the basis of value or retail price.
Some items are, however, chargeable to duty 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 exempted from Central Excise Duty.
Sales Tax
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 adjustment and a
registered person can make adjustment of tax paid at earlier stages
against the tax payable by him on his supplies. Thus the tax paid at
any stage does not exceed 15% of the total sales price of the supplies;
