Keeping your tax reporting compliant with local tax laws is a crucial part of operating a company. It can be a complicated process, especially in rapidly growing markets like Pakistan.
In this article, we will give you an overview of the taxes in Pakistan, including the relevant laws.
Tax laws in Pakistan
The regulatory body for taxes in Pakistan is the Federal Board of Revenue, a department of the Ministry of Finance in Pakistan. The main charges companies are subject to corporate income tax and sales tax.
In Pakistan, the Sales Tax is a form of the Value-Added Tax. The Sales Tax Act, 1990 regulate sales tax on goods. Provincial tax laws govern the sales tax.
The Income Tax Ordinance, 2001 governs the income tax in Pakistan. Income tax differs for types of legal entities and individuals and is amended each year.
Tax year in Pakistan
The Normal Tax Year in Pakistan is from 1 July to 30 June. Any income year ending other than on 30 June is considered a Special Tax Year and needs permission from the Federal Board of Revenue beforehand.
The due date for filing an income tax return for the Normal Tax Year is 31 of December. If your tax year ends between 1 July and 31 December, the due date for filing a tax return for the preceding tax year is 30 September.
Corporate taxes in Pakistan
Corporate Income Tax
Pakistan imposes three different rates of Corporate Income Tax, depending on the size and type of the company.
Corporate Income Tax (CIT) rates in Pakistan
| Type of company | CIT in 2018 | CIT in 2019* | CIT in 2023* |
| Banking company | 35% | 35% | 35% |
| Public and private company | 30% | 29% | 25% |
| Small company | 25% | 24% | 20% |
What is a small company in Pakistan?
Since 1 July 2005, an entity needs to meet the following requirements to classify as a small company:
- paid up capital and undistributed reserves don’t exceed PKR 25 million (~$US200,000)
- has less than 250 employees
- is not formed by splitting up or reconstruction of a company already in existence
- annual turnover below PKR 250 million (~$US 2 million)
Sales Tax in Pakistan
Sales Tax is a charged tax to consumers. The basis of it is the purchase price of goods and services. Since 2014, the standard rate for Sales Tax is 17%.
Under the Sales Tax Act, 1990, all locally produced and imported goods not including computer software, poultry feeds, medicines and unprocessed agricultural produce of Pakistan are chargeable to Sales Tax.
These sectors need to get registration and charge Sales Tax on their supplies and services:
- Manufacturing
- Import
- Services
- Distribution, Wholesale and Retail
Payroll taxes in Pakistan
Personal Income Tax
Personal Income Tax rates are progressive in Pakistan, varying based on the annual income of the individual.
Personal Income Tax (PIT) rates in Pakistan
| Annual salary | Tax rate | |
|
Up to Rs. 400,000 (3,300 USD) |
0% | |
|
Rs. 400,001 to 800,000 (3, 300- 6,600 USD) |
Flat rate of Rs. 1,000 on the excess amount above Rs, 400,001 | |
|
Rs. 800,001 to Rs. 1,200,000 (6,600- 9,900 USD) |
Flat rate of Rs. 2,000 on the excess amount above Rs. 800,001 | |
|
Rs. 1,200,001 to Rs. 2,400,000 (9, 900- 20,000 USD) |
5% of the amount exceeding Rs. 1,200,000 | |
|
Rs. 2,400,001 to Rs. 4,800,000 (20,000- 39,400 USD) |
Flat rate of Rs. 60,000 on annual salary exceeding Rs. 2,400,001.+ 10% of the amount exceeding Rs. 2,400,000 | |
| Exceeding Rs. 4,800,000 | Flat rate of Rs. 300,000 on annual salary exceeding Rs. 4,800,00 + 15% of the amount exceeding Rs. 4,800,000 | |
The employer acts as the withholding agent, and deducts the tax from the salary.
The FBR requires submission of income taxes every month. As for the employee, he/she needs to report the withheld tax to the FBR annually.
Employee benefits in Pakistan
Pakistan employment laws set several benefits for employees, namely:
| Type of benefit | Paid by the employer | Deducted from the employee’s salary |
| Employees Old Age Benefit | 5% | 1% |
| Social Security | 6% | 0% |
|
Gratuity or Provident Fund |
Based on the length of service and the latest salary
8.33% |
N/A
8.33% |
| Bonus | Paid once a year if the company has been profitable | N/A |
#1 Employees Old-Age Benefits
The Employees Old Age Benefit is a retirement plan for the employees paid by the employer to the government. This benefit is applicable if the employer has 5 or more employees.
As prescribed by the Federal Government, 6% is calculated on the minimum wage. By which, the employers pay the 5% while they also deduct the remaining 1% to the employee’s salary.
The minimum wage prescribed by the Federal Government in 2018 is PKR 13,000 (~106 USD). Minimum wages vary in different provinces but this benefit is calculated only on the minimum wages specified by the Federal Government.
This benefit keeps accumulating irrespective if the employee has changed job (in which case new employer will submit this contribution to the government). The employee can avail this benefit on a monthly basis after 65 years of age (retirement).
#2 Social Security
The employee and his dependent (spouse and children) are entitled to this benefit. It covers the following areas in:
- Health
- Maternity
- Injury
- Death
- Other related issues of the employees
This benefit is paid entirely by the employer and is calculated as 6% on the net salary of the employees. However, there is an upper cap which is PKR 22,000 (~178 USD). For employees with an income of PKR 22,000 or above, the Social Security will be the same.
#3 Gratuity or Provident Fund
These are two separate schemes, and the employer must choose at least one. The employer can also opt for both if he wants but the minimum requirement is one.
This is more like a severance package and here’s how to calculate:
A) Gratuity
The employer deposits one salary for each year worked by the employee. The latest salary is the basis for this.
For example, if the employee started with PKR 50,000 salary, worked for seven years with that employer and has accumulated higher salary of PKR 100,000 over the time, he will receive a gratuity of PKR 700,000. (100,000 X 7 *years* = PKR 700,000).
B) Provident Fund
In this scheme, the employer contributes 8.33% of the employee’s salary and 8.33% is deducted from the employee’s salary and at the time of leaving of the job, the employee will receive all the accumulated money.
#4 Bonus
By law, the employer gives the employee a bonus once a year if the company has been profitable in the last year. Any employee whose employment period is 90 days above can receive the profit bonus.
Here’s the calculation of a bonus according to the law:
- if profit is less than the total monthly wage of all employees, 15% of the profit is distributed to the qualified employees
- if profit is equal to the total monthly wage of all employees, 30% of the profit is distributed to the qualified employees
- if profit is greater than the total monthly wage of all employees, at most 30% of the profit is distributed to the qualified employees
Also, take note that foreign employees do not qualify to receive Employees Old-Age Benefit nor Social Security.
Other taxes for companies in Pakistan
The following are the major taxes the companies are subject to:
- Income Tax on Profits
- Sales Tax on Goods
- Sales Tax on Services
- Excise Duty
- Import Duty
Note that a withholding tax can either be an income or sales tax.
How to report taxes in Pakistan?
You need to report your taxes in Pakistan through Tax Returns. Sales taxes and withholding taxes must be reported on a monthly basis. Income tax is reported annually.
Tax reporting can be time-consuming especially in emerging markets like Pakistan. However, to keep your record straight, it is highly recommended to ensure your tax planning and outsource expertise from tax consultants.
Emerhub covers services on accounting and tax compliance in Pakistan such as:
- Tax reporting and compliance
- Accounting and Bookkeeping
- Payroll management
What are the consequences of non-compliance?
Non- compliance of taxes leads to several consequences such as:
- Imprisonment
- Fines
- Penalties
- Tax Surcharge
Want to keep your taxes in Pakistan in compliance?
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