At the same time as it seeks to raise more tax revenue, Pakistan seeks to attract more foreign investment and encourage trade. To these ends, Pakistan has entered into agreements for avoidance of double taxation with major economies around the world. Similarly, bilateral trade agreements and free trade agreements are also in place with some countries.
In this article, we focus on new features that have been added to Pakistan’s income and indirect tax regimes, both to attract investment and to increase tax revenues.
Investor-friendly income tax benefits
Pakistan offers various exemptions and tax credits to attract foreign and local investment. Tax credits of 10 to 20 per cent of investment are available to existing companies for investment in expansion, extension and Balancing Modernization and Replacement (BMR) of plant and machinery. A tax credit equal to 100 percent of tax payable for five years is provided to existing companies and new companies for investment in plant and machinery through 100 percent new equity. A ten-year tax exemption is available for investment in special economic zones.
Pakistan has reduced its corporate tax rate to 34 percent (from 35 percent). Similarly, lower withholding tax rates apply to companies than to other persons for supplies of goods, rendering of services and execution of contracts. Gains on the sale of shares of listed companies, where the shares were held for more than one year, enjoy a zero rate of tax.
Revenue-raising income tax measures
Pakistan has also put in place new revenue measures in order to meet its shortfall in revenue collection. For example, the minimum tax that is payable irrespective of any exemption or loss has been increased to 1 percent of turnover (from 0.5 percent).
Similarly, a new income support levy is payable by individuals at the rate of 0.5 percent of the net moveable wealth of more than 1 million Pakistani rupees (PKR).
To broaden the tax base, all individuals having taxable income must file a wealth statement with their tax return or face strict penal provisions for non-compliance. Further, Pakistan’s Federal Board of Revenue (the Board) has been empowered to seek extensive information from banks about their account holders.
Existing withholding tax rates have been increased and the scope of withholding tax has been extended to include withholdings on:
- payments from distributors, wholesalers, dealers and retailers
- foreign-produced films and TV plays
- education fees
- payments for marriage and other functions.
Under the country’s self-assessment system, taxpayers’ declarations are generally accepted and deemed to be assessed as filed. However, the Board and the Commissioners may select cases for audit and amend a deemed assessment where it is considered erroneous or prejudicial to the interest of revenue.
Depending on the nature of the income, Pakistan’s income tax law provides for tax either on a gross receipt basis (presumptive/final taxation for tax withheld at source) or net income basis. However, to encourage documentation, taxpayers have certain options to declare income on net income basis instead of final taxation basis.
Sales tax operates as a value-added tax (VAT) and generally applies at 17 percent ad-valorem on the import and supply of taxable goods. In certain cases, fixed sales tax and upfront value addition sales tax schemes are in place, where no input tax adjustment or refund is allowed. Sales tax is also applicable at a standard 16 percent rate on payments for specified services. These services have been brought under sales tax net through legislation promulgated by the respective provinces.
Federal Excise Duty
Federal Excise Duty (FED) also operates like a VAT. FED is levied on specified goods imported or manufactured in Pakistan and specified services provided and rendered in Pakistan, including excisable services originated outside but rendered in Pakistan at varied rates. FED usually is charged on the value or retail price or on an ad-valorem basis, but on some items, FED applies based on weight or quantity. The standard rate of FED is 16 percent. FED does not apply where provincial sales tax is enforced.