Taxable income is calculated under five different types of income, as follows:
- Capital gains.
- Income from other sources, which includes income from dividends, royalties, profit on debt (interest), ground rent, sub-lease of land or building, lease of building inclusive of plant or machinery, prize money, winnings, etc.
Related allowable expenses can be deducted except from income from property, dividends, profit on debt (interest), prize money, etc.
Employee’s gross salary is Pakistan-source income and taxable in Pakistan if it is earned from employment exercised in Pakistan or if it is paid by or on behalf of the federal government, a provincial government, or a local authority.
Salary is the amount received by an employee from employment, whether of a revenue or capital nature. It includes leave pay, payment in lieu of leave, overtime, bonuses, commissions, fees, gratuities, work condition supplements, monetary and non-monetary perquisites, any allowance except those granted to meet expenses wholly and necessarily incurred in the performance of the employee’s duties of employment, profits in lieu of or in addition to salary, pensions, annuities, and tax reimbursement. In addition, amounts or perquisites paid or provided by an associate of the employer, a third-party under an arrangement with the employer or associate of the employer, a past employer or a prospective employer, or payments to an associate of the employee are also to be considered as salary.
Salaried individuals employed by the oil exploration and production sector are exempt from tax for a period of three years from the date of their arrival in Pakistan.
Diplomats and individuals entitled to United Nations (Privileges and Immunities) Act 1948 are exempt from tax on their salaries.
The extent of taxability and exclusions from income of some perquisites are discussed in the Deductions section.
Employee share scheme
The fair market value of the shares determined at the date of issue under an employee share scheme, including as a result of the exercise of an option or right to acquire the shares, as reduced by any consideration paid by the employee for the shares, shall be chargeable to tax as salary. However, where shares are issued to the employee subject to restriction on the transfer of such shares, no amount shall be included in salary of the employee until the earlier of the time the employee has a free right to transfer the shares or at the time when the employee disposes of the shares.
The value of the right or option to acquired shares under an employee share scheme is not chargeable to tax.
An employee is taxed on the exercise of an option on the fair market value of the shares as reduced by the cost to the employee on acquisition. The gain on sale is taxed in the year of disposal, considering the fair market value at the time of exercise of the option as a cost of the employee.
Foreign-source income of returning expatriates
Foreign-source income of returning expatriates is exempt for four years from the year of the return.
Capital gains on the sale, exchange, or transfer of movable capital assets are taxable. However, gains on the sale of capital assets held for personal use by a person or any member of a person's family who is dependent on the person, assets on which a person is entitled to depreciation or amortisation, stock in trade (not being stocks and shares), consumables, and raw materials held for business purposes are exempt from levy of tax. Capital gains realised within one year of acquisition are fully taxable; after one year, 75% of such gains are taxable and 25% are exempt.
Capital gains on the sale of shares of Pakistani public companies listed on a stock exchange in Pakistan, including modaraba certificates, are exempt if the instrument is acquired before 1 July 2013. Capital gains on shares acquired after 1 July 2013 are taxable at rates varying from 0% to 16% depending on the period of holding and date of acquisition. Gains on shares acquired after 1 July 2016 are taxable at the rate of 15% for filers and 20% for non-filers, irrespective of period of retention.
Capital gains and investment income earned outside Pakistan are not taxable in the case of non-residents.
Dividend income is subject to tax at 12.5% for filers and 15% for non-filers.
Interest income is subject to tax at 10%.