Tax credits and 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 categories of taxpayers or for a specific time period.
Significant tax credits/exemptions under the local income tax law are provided as follows:
- Profits and gains derived from an electric power generation project set up in Pakistan are exempt from tax. This exemption is restricted to persons entering into agreement with, or to whom a letter of intent is issued by, the Federal or Provincial Government for setting up an electric power generation project in Pakistan up to 30 June 2021 and who obtained letter of support on or before 30 June 2023.
- Any income derived by a collective investment scheme or a REIT scheme (including an SPV) shall be exempt from tax if not less than 90% of its accounting income of the year, as reduced by accumulated losses and capital gains, is distributed amongst the unit holders. Reduced WHT rate of 3% (instead of 8%) is prescribed for payment against management services provided by REIT management companies.
- Profits and gains derived from a transmission line project set up in Pakistan on or after 1 July 2015 are exempt from income tax for a period of ten years, subject to certain conditions, which, inter alia, includes projects that are set up until 30 June 2022.
- Income derived by a zone 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 from a bagasse/biomass-based cogeneration power project having certain level of capacity is made exempt from income tax. A reduced WHT rate (7.5%) is introduced on payment of dividend by these entities, subject to certain conditions.
- Profits and gains derived by new deep conversion refineries (approved by the Federal Government before 31 December 2021) have also been made exempt from income tax for 20 years (10 years for existing refineries from date of upgrading), subject to certain conditions.
- Profits and gains derived from a sale of electricity by the 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 privatisation.
- Income from cinema operations has been exempted from tax for a period of five years from the commencement of its operations.
- Profits and gains derived by venture capital companies and venture capital funds are exempt till 30 June 2025.
- Tax exemption is provided to certain charitable organisations prescribed and enlisted in the local law, subject to certain conditions.
Certain exemptions and concessions for ‘special technology zones’ (STZs)
Dividend income and long-term capital gains from investments in zone enterprises, as defined in the STZ Ordinance, by a venture capital fund is exempt for ten years commencing from issuance of licence by the authority to the zone enterprise.
Profits and gains from the development and operations of the zones by a zone developer, as defined in the STZ Ordinance, is exempt for ten years from the date of signing of the development agreement.
Profits and gains of zone enterprises, as defined in the STZ Ordinance, is exempt for ten years from the date of issuance of licence by the authority.
Significant exemptions and tax credits withdrawn
The following exemptions and tax credits have been withdrawn:
- Tax credit for person employing fresh graduates.
- First year depreciation allowance on specified assets at 90% of cost of assets.
- Tax credit for enlistment on registered stock exchange.
- Certain tax credits for newly established industrial undertaking.
- Exemption available on profits and 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 and 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 collective investment schemes registered by regulatory authority under the non-banking finance companies and notified entities regulation 2007.
- Profits and gains from an industrial undertaking set up between a timeline, duly certified by the Pakistan Telecommunication Authority, engaged in the manufacturing of cellular mobile phones.
- 100% tax credit regime available to export of software, information technology (IT) services, and IT-enabled services. However, a reduced WHT of 0.25% on the export proceeds of the IT sector is available for tax years 2024 to 2026, provided the person is registered with Pakistan Software Export Board.
Activities of small companies are encouraged with a reduced income tax rate of 20% (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 Act, 2017
- 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 have now been transposed into the tax credit regime. As a result, the 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.