Tax credits & exemptions
The Income Tax Ordinance, 2001 (i.e the local tax law) provides for exemptions of whole or part of tax, reduced applicable tax rates, inapplicability of certain provisions and reduction in tax liability. These exemptions are either based on specific category of taxpayers or for a specific time period. Significant tax credits / exemptions for the year 2021-22 are listed below:
Profits and gains derived from an electric power generation project set up in Pakistan are exempt from tax. This exemption is restricted for persons entering into agreement or to whom letter of intent is issued by Federal or Provincial Government, for setting up an electric power generation project in Pakistan upto June 30, 2021.
Profits and gains derived from a transmission line project setup in Pakistan on or after July 1, 2015 are exempt from income tax for a period of 10 years, subject to certain conditions. One such condition provided is that such project should be setup by June 30, 2018. Now, the said date is extended until June 30, 2022.
Profits and gains derived by refineries, which are setup between 1 July 2018 and 30 June 2023, have been granted exemption from tax for a period of 20 years, upon fulfilment of certain conditions.
Low-cost housing projects have been incentivised by allowing a reduction in tax liability (arising on profits and gains) by 50%, subject to fulfilment of certain conditions.
The tax payable on the income, profits, and gains of projects of low-cost housing developed or approved by the Naya Pakistan Housing and Development Authority (NAPHDA) or under the Ehsaas Programme shall be reduced by 90%. Moreover, in case of banking companies, the taxable income arising from additional advances to NAPHDA for low cost housing schemes shall be taxed at the rate of 10%. However, the said relief shall be available only for the projects which commence on or before June 30, 2024.
A tax credit of 25% of the amount invested is available to a green field industrial undertaking engaged in manufacturing or ship building and an industrial undertaking engaged in the manufacturing of machinery and equipment used for generation of renewable energy.
Income derived by an enterprise set up in ‘special economic zones’ is exempt from tax for a period of ten years, starting from commencement of commercial operations/production, subject to certain conditions. These ‘special economic zones’ have been established in different territories of the country.
Profits and gains derived by liquefied natural gas terminal operators and terminal owners are exempt from tax for a period of five years beginning from the date of commercial production.
Profit and gains derived from a bagasse / biomass based cogeneration power project having certain level of capacity is made exempt from income tax. While, reduced withholding tax rate (7.5%) is introduced on payment of dividend by these entities subject to certain conditions.
Profit and gains derived by new deep conversion refineries (approved by Federal Government before Dec 31, 2021) have also been made exempt from income tax for 20 years (10 years for existing refineries from date of upgradating) subject to certain conditions.
Profit and gains derived from a sale of electricity by National Power Parks Management Company (Private) Limited or by its demerged entities have been made exempt from income tax commencing from commercial operations dates and continuing after the dates of change of ownership through privatization.
Any sum remitted to Pakistan through banking channel in foreign currency to an international buying house from its non-resident principal to meet its expenses in Pakistan are made exempt from income tax.
Similarly, any sum chargeable under the head salary received by a person who, not being a citizen or resident of Pakistan, is engaged as an expert by an international buying house is also made exempt from income tax.
‘The concept of international trade house is accordingly explained in the law as persons acting as buying offices, buyers’ agents, or representatives of international buyers for facilitating exports from Pakistan and are registered as a liaison office or companies acting as cost centers with sole purpose to bring export orders to Pakistan and are not engaged in any other business transactions.’
Certain exemption and concessions have been introduced recently for ‘special technology zones’ [‘STZ’] as under:
Dividend income and long-term capital gains from investments in zone enterprises as defined STZ Ordinance by a venture capital fund for investment in zone enterprises is exempt for 10 years commencing from issuance of license by the authority to the zone enterprise.
Profit and gains from the development and operations of the zones by zone developer as defined in STZ Ordinance is exempt for 10 years from the date of signing of the development agreement.
Profit and gains of zone enterprises as defined in STZ Ordinance is exempt for 10 years from the date of issuance of license by the authority.
Profit and gains of STZ authority established for infinite period.
In terms of understanding reached between the trade bodies and Government, reduced withholding / minimum tax rates for the traders, wholesalers and retailers of specified sectors have been introduced as under:
Reduced tax withholding rate and minimum tax rate (on turnover) of 0.25% on receipts of dealers and sub-dealers of sugar, cement and edible oils also extended to wholesalers, retailers and distributers. The scope of goods / sectors covered under this concession expanded to also include fertilizer and fast-moving consumer goods and electronic (excluding mobile phones) subject to certain conditions.
The rate of advance tax collection by manufacturer or commercial importer of fertilizers reduced to 0.25% from 0.7%, if the distributor / dealer / wholesaler is active taxpayer for both income tax & sales tax.
Distributers, dealers, wholesellers and retailers of locally manufactured mobile phones shall no longer be required to act as withholding agent in terms of payment for sale of goods.
Tax liability of cotton ginners on their income shall not be more than 1% of their turnover from cotton lint, cotton seed, cotton seed oil and cotton seed cakes. The tax so payable shall be final tax in respect of their cotton ginning and oil milling activities only.
Significant exemption / tax credits withdrawn:
Tax credit for person employing fresh graduates.
First year depreciation allowance on specified assets @ 90% of cost of assets.
Tax credit for enlistment on registered stock exchange.
Certain tax credits for newly established industrial undertaking – refer section 65D & 65E.
Exemption available on profit & gains derived from the refining and concentrating business (subject to certain conditions) to an undertaking in business of exploration and extraction of mineral deposits.
Certain concessions available to Oil & Gas exploration companies’ including deduction of 100% depreciation expense in case of below ground installations.
Profit on debt payable to a non-resident in respect of loans.
Distribution from specific collectives investment schemes registered by regulatory authority under the non-banking finance companies and notified entities regulation 2007.
Profit and gains from an industrial undertaking setup between a time line, duly certified by Pakistan Telecommunication Authority, engaged in the manufacturing of cellular mobile phones.
Activities of small companies are encouraged with a reduced income tax rate of 21% (see the Taxes on corporate income section).
A small company has been defined to mean a company that:
- is registered on or after 1 July 2005 under the Companies Ordinance, 1984
- has a paid-up capital plus undistributed reserves not exceeding PKR 50 million
- has employees not exceeding 250 at any time during the year
- has an annual turnover not exceeding PKR 250 million, and
- is not formed by splitting up or the reconstitution of business already in existence.
Charitable donations credit
Companies are allowed a tax credit equivalent to 20% of their taxable income in respect of donations to:
- any board of education or university in Pakistan, established by or under federal or provincial law
- any educational institution, hospital, or relief fund established or run in Pakistan by federal government, provincial government, or local government, and
- any non-profit organisation.
Companies were earlier allowed a straight deduction against taxable income (up to 20% of taxable income) in case of donations made to certain approved institutions. Donations to these charitable institutes earlier eligible for direct deduction from income has now been transposed into tax credit regime. As a result of that, overall upper limit for tax break for the donors, in respect of charitable donations, has been reduced
Foreign tax credit
Where a resident taxpayer derives foreign-source income on which foreign income tax is paid within two years from the year in which it is derived, the taxpayer is allowed a tax credit equal to the lower of (i) the foreign income tax paid or (ii) the Pakistan tax payable in respect of that income. However, foreign tax paid is not refundable.