Types of taxes in Pakistan

There are different types of taxes imposed by the government of Pakistan in the country to regulate and maintain financial records. These taxes are:

Personal income tax rates

If an individual’s salary income exceeds 75% of his or her taxable income, the following rates apply:

Over	Not over	Taxes in PKR	Tax on excess (%)
0	600,000		0
600,000	1,200,000		5
1,200,000	1,800,000	30,000	10
1,800,000	2,500,000	90,000	15
2,500,000	3,500,000	195,000	17.5
3,500,000	5,000,000	370,000	20
5,000,000	8,000,000	670,000	22.5
8,000,000	12,000,000	1,345,000	25
12,000,000	30,000,000	2,345,000	27.5
30,000,000	50,000,000	7,295,000	30
50,000,000	75,000,000	13,295,000	32.5

In other cases (individuals and associations of persons or AOP), the following tax rates apply:

Over	Not over	Taxes in PKR	Tax on excess (%)
0	400,000		0
400,000	600,000		5
600,000	1,200,000	10,000	10
1,200,000	2,400,000	70,000	15
2,400,000	3,000,000	250,000	20
3,000,000	4,000,000	370,000	25
4,000,000	6,000,000	620,000	30
6,000,000	1,220,000	670,000	35

Withholding requirements

The withholding tax (WHT) on dividends, interest, royalties, and fees for technical services derived from Pakistan sources has to be withheld from the gross amount paid to the recipient. Most of these payments do not attract an enhancement of 100%, even if the recipients are not listed on ATL.

Taxes on corporate income

Residents are taxed on their worldwide income. In the case of non-resident companies operating in Pakistan through a branch, their Pakistan-sourced income attributable to the branch is taxed at rates applicable to companies.

The following is the federal corporate tax rate on taxable income for the tax year 2022:

Company Type	Tax Rate (%)
Banking company	35
Public company other than a bank	29
Any other company	29
Small company (see the Tax credits and incentives section for more information)	21

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Companies and small companies taxation, annual rate, at the following rates in the future:

Tax year	Company rate (%)	Small company rate (%)
2021	29	22
2022	29	21
2023 and onwards	29	20

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A ‘public company’ is one listed on any Pakistani stock exchange or one in which at least 50% of the shares are held by the federal government or public trust.

Certain transactions involving persons not listed on the ATL increase WHT by 100%.

‘Women enterprise’ is a new concept introduced this year, which has been defined as a startup founded by a woman on or after July 1, 2021. Those businesses whose 100% shareholding is held or owned by women shall be taxed at a reduced rate of 25 percent on their profits and gains from business chargeable to tax under the heading “Income from Business”. A business that is formed through a transfer, reconstitution, reconstruction, or breakup of an existing business will not be eligible for the benefit of this clause.

Taxation of a Permanent Establishment (PE)

Taxable income of an individual shall be computed on the basis of the following principles:

A PE is a distinct and independent entity that deals independently with the non-resident.
A deduction will also be allowed for executive and administrative expenses, whether incurred in Pakistan or elsewhere.
The total head office expenditure of the PE shall be allowed as a deduction in proportion to the turnover of the PE, just as the non-resident’s total head office expenditure bears to its worldwide turnover.
PEs are required to include royalties, compensation for services (including management services), and interest on loans (except in banking businesses) when computing their taxable income.
No deductions will be allowed for interest paid on loans acquired by a non-resident to finance the operations of a PE (or for insurance premiums relating to such loans).
A PE of a non-resident person receives ‘minimum tax’ on the gross consideration derived from the sale of goods (in the same state), rendering of services, and execution of contracts.
Also, PEs of non-resident persons are also eligible for a reduced tax/WHT rate of 3%, similar to that applicable to resident service providers. Here are the services:
Transport services.

Freight forwarding services.
Air cargo services.
Courier services.
Manpower outsourcing services.
Hotel services.
Security guard services.
Software development services.
IT services and IT-enabled services.
Tracking services.
Advertising services (other than by print or electronic media).
Share registrar services.
Car rental services.
Building maintenance services.
Engineering services.
Services rendered by Pakistan Stock Exchange Limited and Pakistan Mercantile Exchange Limited.
Inspection, certification, testing, and training services.
Oil field services

Taxation of Small & Medium-sized manufacturing enterprises (SMEs)

SMEs are defined as manufacturers whose business turnover does not exceed Rs 250 million in a tax year. As soon as the turnover of the business exceeds Rs 250 Million, the company ceases to be an SME.
SMEs are required to register with the FBR on the IRIS web portal or the Small and Medium Enterprise Development Authority (SMEDA) on its SME registration portal. Companies covered by the definition of SME do not qualify as ‘small companies’. For tax purposes, SMEs are classified into the following two categories, and tax on taxable income is based on the following rates:

Category 1: Companies whose taxable income does not exceed PKR 100 million;
Category 2: Businesses with an annual turnover greater than PKR 100 million, but less than PKR 250 million.

The FTR is an option for SMEs as well. Exercise of the said option must be made at the time of filing the return, and it will remain irrevocable for three tax years.
SMEs opting to be taxed under FTR will not be subject to tax audits under sections 177 and 214C. Tax rates under FTR are as follows:
Category 1: No more than PKR 100 million in annual business turnover;
Category 2: 0.5% of gross turnover, when the business turnover exceeds PKR 100 million but does not exceed PKR 250 million. SMEs are not subject to a minimum tax on turnover.

Taxation of certain contracts executed by non-resident persons

A Pakistan-sourced income will consist of income derived by non-residents/affiliates from turnkey contracts that involve the supply of goods, installation, construction, assembly, commissioning, guaranteeing, and supervising activities, including offshore supplies (i.e. a cohesive business operation).

‘Cohesive business operations’, includes:

The provision of goods, installation, construction, assembly, commissioning, guarantees, or supervisory activities as a whole, in which all or principal activities are undertaken or performed by the person or his associates, and
Whether or not the title to the goods passes outside Pakistan, the supply of goods includes goods imported in the name of the associate or any other person.

For payments made against transactions that are part of a cohesive business operation, the Commissioner (on the application of the payer) may allow a payment to be made after a deduction of 20% of the tax chargeable on that payment, which is normally 7%. In the instant case, the effective rate of withholding is 1.4%. Under certain conditions, the rate is 1% for an offshore supply contract for an IPP located in Azad Jammu & Kashmir.

Minimum tax on turnover

For companies that owe a tax of less than 1.25% of their turnover, 1.25% of their turnover must be paid as a minimum tax. In certain cases/sectors, turnover tax is paid at rates lower than 1.25% (between 0.25 and 0.75 percent).
In the present case, the excess tax paid can be carried forward to a future tax year. However, these taxes cannot be adjusted against tax liabilities until five years after the tax year in which they were paid.

Types of taxes in Pakistan