Pakistan

Corporate - Significant developments

Last reviewed - 01 January 2021

Considerable and wide-ranging amendments have been made in Pakistan corporate tax laws in recent periods to document the undocumented sectors of the economy and digitalise the taxation authorities’ operations in order to widen the tax base. Currently, keeping in view the extraordinary economic circumstances due to the prevalent COVID-19 pandemic, the government of Pakistan has introduced amendments in the following areas:

  • Certain beneficial provisions have been introduced to incentivise the construction industry, including a fixed tax regime introduced for builders and developers, along with various other tax incentives. In addition, significant reductions have been made in tax rates applicable on immovable property capital gains. For details, please see Taxation of builders and developers in the Taxes on corporate income section.
  • For determining capital gains on disposal of immovable property and the related holding periods, the distinction with reference to ‘open plots’ and ‘constructed properties’ has been removed. For details, please see Capital gains in the Income determination section
  • The presently applicable presumptive tax regime for resident shipping businesses (on tonnage basis) is extended to 30 June 2030.
  • The reduced rate facility of 3% for withholding of tax on certain specified services presently available to resident companies has also been made available to the permanent establishment (PE) of a non-resident person. Minimum tax has also been made applicable to PEs of non-resident persons. For details, please see Taxes of a permanent establishment in the Taxes on corporate income section
  • A restriction has been introduced regarding deduction of foreign profit on debts of certain foreign controlled resident companies in Pakistan during a tax year. For details, please see Thin capitalisation in the Group taxation section
  • Payments to non-resident persons in respect of dividend, royalty, fee for technical services, insurance, re-insurance, and profit and debt are now excluded from the requirement of 100% enhanced withholding (subject to certain conditions), even if their names are not appearing in the Active Taxpayers List (ATL).
  • Restrictions have been introduced on claim of various deductions/tax credits (e.g. lease rentals, sales to unregistered persons, depreciation, tax credit on enlistments). For details, please see the Deductions and Tax credits and incentives sections.
  • The reduced withholding tax (WHT) rate facility at 3% earlier available for certain services is now also extended to certain other categories (e.g. warehousing services, services rendered by asset management companies, data services provided under licence issued by the Pakistan Telecommunication Authority, telecommunication infrastructure [tower] services). 
  • Rates of advance tax collectible on import of goods have been revamped, with rates of 1% and 2% made applicable for raw materials and capital goods imported for own use, and a rate of 5.5% introduced for finished goods (which shall be a minimum tax). The Federal Board of Revenue (FBR) is also empowered to reclassify any goods from finished goods to raw material, subject to certain conditions, for which detail procedures are being prescribed. 
  • Enabling provisions have been introduced for automation of certain processes/operations, as well as providing necessary legal cover, including the following:
    • Centralised income tax refund office has been established for automated processing/payment of refunds.
    • Automated scrutiny of returns.
    • Automated computation of ‘turnover’.
    • Electronic access to records by the Commissioner.
    • Conduct audit proceedings electronically.
    • Real-time integration of taxpayers’ records with various agencies/ organisations.
  • The concept of ‘tax profile’ has been defined with penalties and other negative consequences also specified for taxpayers who fail to file or update such tax profiles. 
  • The concept of ‘agreed assessments’ has been introduced in law with that of ‘best judgement assessment’ done away with. Tax authorities are also empowered to determine taxable income on the basis of ‘sectoral benchmarks/ratios’ in certain cases.
  • From 1 January 2021, electronic filing of appeal with the Commissioner of Inland Revenue (Appeals) has been introduced under the law.
  • Requirements regarding furnishing of information by banking companies to the tax authorities have been further amended. Banks are now required to submit account holders deposit statement, credit card payments statement, cash withdrawal statement, etc.
  • Taxpayers can now electronically file an application before the Commissioner of Inland Revenue to obtain status of 'Green Field Industrial Undertaking', in order to avail exemptions on account of taxability of profits and gains earned by the said industrial undertaking, subject to certain conditions.
  • Amendments have been made for obtaining exemption/reduce rate certificate regarding WHT from payments made to non-residents. The requirement to attach certain documents (i.e. affidavit, certificate of residence, copy of contract, copy of invoice, any other document/information) has now been made compulsory in order to apply for the said exemption before the Commissioner of Inland Revenue.
  • Certain industries are now required to install fiscal electronic devices and software for online integration of their businesses.