Pakistan

A resident company is taxed on its worldwide income. Non-resident companies operating in Pakistan through a branch are taxed on their Pakistan-source income attributable to the branch at rates applicable to a company.

The federal corporate tax rates on taxable income are as follows:

* The term ‘public company’ implies a company listed on any stock exchange in Pakistan or one in which not less than 50% of the shares are held by the federal government or a public trust.

Super tax

In addition to above, super tax is imposed at the following slab rates:

* Pakistani rupees

The concept of super tax was reintroduced by the government on high earning persons in tax year 2022. Slab-wise rates were prescribed for tax year 2022 with a maximum rate of 4%. With regard to certain specified sectors, an enhanced rate of 10% was prescribed for tax year 2022 only, and for banking companies, 10% super tax was applicable for tax year 2023.

In relation to the retrospective application of super tax for tax year 2022 and enhanced rate applicable for specified sectors causing discrimination, Constitution Petitions were filed before Higher Courts in Pakistan. The matter is currently sub-judice before the Supreme Court.

Through Finance Act, 2023, new slab rates (as provided in tabular form above) for super tax were introduced and are applicable for the tax year 2023 and onwards. As a result, the highest slab rate of 10% will be applicable on taxpayers from all sectors having income in excess of PKR 500 million, thus eliminating the discrimination.

Taxation of small and medium enterprises (SMEs) engaged in the manufacturing sector

An SME is defined as a person who is engaged in manufacturing of goods whose business turnover in a tax year does not exceed PKR 250 million. In the case that annual business turnover exceeds PKR 250 million, it shall cease to be an SME for such tax year and onwards.

An SME is required to register with the Federal Board of Revenue (FBR) on the IRIS web portal or the Small and Medium Enterprises Development Authority (SMEDA) on its SME registration portal. A company covered by the definition of an SME will not qualify as a ‘small company’.

For the purpose of taxation, SMEs are classified into the following two categories, and tax on taxable income is required to be computed at the rates given below:

• Category 1: 7.5% of the taxable income, where annual business turnover does not exceed PKR 100 million.
• Category 2: 15% of the taxable income, where annual business turnover exceeds PKR 100 million but does not exceed PKR 250 million.

SMEs can also opt to be taxed under the final tax regime (FTR). The said option is required to be exercised at the time of return filing, and the same will be irrevocable for three tax years. The SMEs who opt to be taxed under the FTR shall not be subject to tax audit under sections 177 and 214C. The category-wise rate of tax under the FTR is given below:

• Category 1: 0.25% of the gross turnover, where annual business turnover does not exceed PKR 100 million.
• Category 2: 0.5% of the gross turnover, where annual business turnover exceeds PKR 100 million but does not exceed PKR 250 million.

Minimum tax on turnover shall not apply to SMEs.

Taxation of exports

Export of goods

Since the early 1990s, export of goods remained subject to the FTR, whereby WHT collected by the Authorised Dealers on remittance of export proceeds was considered to be final discharge of their tax liability, irrespective of underlying income/loss. A similar tax regime was also applicable for entities operating in Export Processing Zones (EPZs) as well as for indirect exporters.

Through Finance Act 2024, the regime for direct/indirect exporters has been amended, whereby tax collected from them at the rate of 1% is to be treated as minimum tax, and such persons shall be required to compute their normal taxable income/loss in accordance with applicable provisions and in case the 1% WHT is lower than tax computed on such taxable income the incremental tax will have to be paid. As a result of change in tax regime, exporters will also be liable to pay super tax as against the earlier position regarding non-applicability on their income having been subject to final tax.

Apart from the above, a new provision has now been added in the advance tax section whereby specified withholding agents are now required to collect 1% advance income tax from the exporters of goods (whether direct or indirect) at the time of realisation of export proceeds, etc.

Export of services

Export of services is subject to the FTR, whereby WHT collected at the rate of 1% (0.25% applicable only in case of an IT/IT-enabled service provider registered with Pakistan Software Export Board till tax year 2026) by the Authorised Dealers on remittance of export proceeds is considered to be final discharge of their tax liability, irrespective of underlying income/loss and subject to certain conditions. However, taxpayers can opt to be taxed under the normal tax regime, where the corporate tax rate applies (as tabulated above).

Taxation of builders and developers

Builders and developers are subject to a special tax regime based on their taxable profits from specific activities, as follows: 

• Construction and sale of residential, commercial, or other buildings at 10% of taxable profits as a percentage of gross receipts.
• Development and sale of residential commercial or other plots at 15% of taxable profits as a percentage of gross receipts.
• Income derived from both the above activities together at 12% of taxable profits as a percentage of gross receipts.

Where a taxpayer, while explaining the nature and source of the amount credited or the investment made, money or valuable article owned, or the funds from which the expenditure was made, takes into account any source of income that is subject to tax as above, the taxpayer shall not be allowed to take credit of any sum as is in excess of taxable profits as computed above. If, however, one’s actual taxable income is more than the taxable profits as computed above, the taxpayer shall be entitled to take credit of such excess income subject to the payment of tax at the applicable normal rates.

A builder or developer established by an Act of the Parliament or a Provincial Assembly or by a Presidential Order and who is engaged in activities for the benefit of its employees or otherwise (including activities for the planning and development of and for providing and regulating housing and ancillary facilities in a specified or notified area) is not covered by this regime.

Taxation of a permanent establishment (PE)

The following principles shall apply in computing taxable income of a PE: 

• It is a distinct and separate entity dealing independently with the non-resident of which it is a PE.
• In addition to business expenditure, executive and administrative expenditure, whether incurred in Pakistan or elsewhere, will be allowed as deductions.
• Head office expenditure, including rent, salaries, travelling, and any other expenditure that may be prescribed, shall be allowed as a deduction in proportion to the turnover of the PE in the same proportion as the non-resident’s total head office expenditure bears to its worldwide turnover.
• Royalties, compensation for services (including management services), and interest on loans (except in banking business) payable or receivable to or from a PE’s head office shall be considered in computing taxable income of the PE.
• No deduction will be allowed for any interest paid on loans acquired by a non-resident to finance the operations of a PE (or for the insurance premium in respect of such loans).
• Income from sale of goods (in the same state), rendering of services, and execution of contracts derived by a PE/branch of a non-resident person is subject to ‘minimum tax’ of the gross consideration at the following rates:
  
  

  Description	WHT rate (%)
  			Sale of goods	5
  Services	9
  Execution of contract	8

• Further, in line with the regime applicable for resident service providers, a reduced tax/WHT rate of 4% is also applicable with respect to certain specified services rendered by a PE of a non-resident person. The services are as follows:  

• • Transport services.
  • Freight forwarding services.
  • Air cargo services.
  • Courier services.
  • Manpower outsourcing services.
  • Hotel services.
  • Security guard services.
  • Software development services.
  • IT services and IT enabled services.
  • Tracking services.
  • Advertising services (other than by print or electronic media).
  • Share registrar services.
  • Car rental services.
  • Building maintenance services.
  • Engineering services.
  • Services rendered by Pakistan Stock Exchange Limited and Pakistan Mercantile Exchange Limited.
  • Inspection, certification, testing, and training services.
  • Oil field services.

The above stated rates are enhanced by 100% in case of inactive taxpayers.

Minimum tax on turnover is also applicable at a rate of 1.25% on PE of a non-resident. In certain cases/sectors, such turnover tax is payable at rates less than 1.25% (ranging from 0.25% to 0.75% of turnover). For detail, refer to Minimum tax on turnover below.

Taxation of certain contracts executed by non-resident persons

Income derived by non-resident persons/their affiliates from turnkey contracts that are part of an overall arrangement for supply of goods, installation, construction, assembly, commission, guarantee, and supervisory activities, including offshore supply of goods (i.e. cohesive business operation), constitutes Pakistan-source income.

‘Cohesive business operations’, includes:

• an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees, or supervisory activities, and all or principal activities are undertaken or performed either by the person or the associates of the person, and
• supply of goods includes the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.

In case of payment against transactions that constitutes part of an overall arrangement of a cohesive business operation, the Commissioner (on application made by the payer) may allow the person to make payment after deduction of tax equal to 20% of tax chargeable on such payment, which is normally 8%. Consequently, the effective rate of withholding in the instant case shall be 1.6%. This rate is 1% in case of offshore supply contract for an independent power producer (IPP) located in Azad Jammu and Kashmir, subject to certain conditions.

Minimum tax on turnover

Where the tax payable by a company is less than 1.25% of the turnover, the company is required to pay a minimum tax equivalent to 1.25% of the turnover, except where the company is exempt from levy of minimum tax. In certain cases/sectors, such turnover tax is payable at rates less than 1.25% (ranging from 0.25% to 0.75 % of turnover).

Tax paid in excess of normal tax liability in the instant case can be carried forward for adjustment against normal tax liability of the subsequent three tax years.

Transaction-based minimum taxes

Certain WHTs applicable on payments made to residents and non-residents are considered as minimum tax while determining their corporate tax liability on a net income basis. These transactions, inter alia, include sale of goods (unless by a company being a manufacturer of such goods or by a company listed on a Pakistani stock exchange), rendering of services, and execution of contracts (unless payment received by a company listed on a Pakistani stock exchange). 

Advance income tax paid at the import stage is minimum tax in case of commercial importers, while it is an adjustable tax on import of raw material by industrial undertakings, with few exceptions.

Alternate Corporate Tax (ACT)

Under the ACT, the minimum tax liability of a company is the higher of 17% of accounting income or the corporate tax liability determined under the Ordinance, including minimum tax on turnover. This concept is applicable for all companies except insurance companies, companies engaged in exploration and production of petroleum, banking companies, and companies enjoying a reduced rate of tax.

Exempt incomes, capital gain on disposal of specified listed securities, income entitled to 100% tax credit on account of equity investment, and income of non-profit organisations, trusts, and welfare institutions are not subject to levy of ACT.