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Corporate - Significant developments
Last reviewed - 31 December 2019
The generally applicable corporate tax rate has been fixed at 29% for tax year 2019 and onwards. However, in respect of ‘small companies’, the scheme relating to gradual reduction of tax rates (1% each year with rate of 20% applicable for tax 2023 and onwards) remains applicable.
The general rate of minimum tax on ‘turnover’ for companies has also been enhanced from 1.25% to 1.5%. Further, lower rates of ‘minimum tax’ applicable in case of specified sectors/persons have also been enhanced. For details, please see Minimum tax on turnover in the Taxes on corporate income section.
The final tax regime applicable with respect to various streams of income has principally been abolished and the same has been replaced with the ‘minimum tax regime’ (with the exception of exports, dividends, prizes and winnings, and sale of petroleum products, etc.).
From tax year 2020 onwards, tax on undistributed profits, leviable at 5% of ‘accounting profit before tax’ of public companies, has been abolished.
Banking companies are required to pay super tax for tax years 2020 and 2021 at a uniform rate of 4%. Levy of super tax for other persons has been done away with from tax year 2020 and onwards.
Income arising to banking companies from additional advances made to the following persons/sectors shall be subjected to a reduced rate of tax at 20% for tax years 2020 to 2023 (as against the applicable rate of 35%), with levy of super tax also not attracted thereon, which are (i) low cost housing finance, (ii) farm credit, and (iii) micro, small, medium enterprises.
For banking companies, from tax year 2020 onwards, the additional taxable income arising from investment in Federal government securities has been made taxable at an enhanced rate of 37.5% (as against the normal rate of 35%).
Substantial amendments have been introduced in connection with the taxation scheme applicable to capital gain accruing on disposal of immovable property. For details, please see Capital gains in the Income determination section.
The exemption from levy of tax on inter-corporate dividend distribution in case of companies availing ‘group relief’ has been reinstated, without the condition of surrendering of loss to avail such exemption. For details, please see the Group taxation section.
The tax rates on dividends received from certain categories of persons has been separately specified. For details, please see Dividend income in the Income determination section.
Previously, loss on disposal of listed and other securities could only be set off against capital gains (and not allowed to be carried forward). From tax year 2019 and onwards, such loss has now been allowed to be carried forward and set off against future capital gains on such securities, up to a maximum of three tax years.
The rate of withholding tax (WHT) deducted/deductible (considered as minimum tax) for specific service sector companies has been amended to 3%, with facility of carry forward of minimum tax/issuance of exemption certificate withdrawn.
Where the life of an intangible asset is not ascertainable, amortisation is allowed over a period of 25 years instead of 10 years. Further, self-generated goodwill or any adjustment arising on account of accounting treatment is excluded from the scope of intangible assets.
The tax credit at 10% on investments made for the purposes of balancing, modernisation, and replacement will no longer be available in respect of plant and machinery installed after 30 June 2019. Further, rate of such tax credit for tax year 2019 has also been reduced to 5%.
Royalty received by residents has been made subject to adjustable WHT at 15%.
‘Initial allowance’ on building earlier available at 15% of cost has now been withdrawn.
The concept of filer and non-filer (persons subject to higher WHT rates) has been abolished. Separate provisions have been introduced to deal with persons who are not on the Active Taxpayer List (ATL) of the Federal Board of Revenue (FBR), and the WHT rate in such cases is made applicable at 100% of the original amount of tax.
Payment for purchase of immovable properties exceeding 5 million Pakistani rupees (PKR) and any other asset exceeding PKR 1 million, paid for otherwise through banking modes, shall be subject to various restrictions/penalties: (i) related cost not to be allowed for computing any taxable gain, (ii) asset shall not be eligible for any depreciation or amortisation allowance, and (iii) failure to comply with these provisions would also result in imposition of penalty at 5% of cost.
The definition of ‘cottage industry’ (providing exemption threshold for registration/levy of value-added tax [VAT]) has been substantively revamped in order to broaden the sales tax base and improve collection and enforcement.
Local supplies of export oriented sectors (textile, leather, footwear, etc.), which were previously subject to sales tax at 0% / reduced sales tax rates, have now been made subject to sales tax at the standard rate of 17%.
Certain policy/procedural modifications have also been introduced vis-à-vis the VAT regime applicable in the case of retailers and other important sectors of the economy.