Pakistan

Corporate - Taxes on corporate income

Last reviewed - 22 July 2022

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 revised federal corporate tax rates on taxable income (for tax year 2022, 2023 and onwards) are as follows:

Company type

                      Tax rate (%)

2022

2023

2024 & onwards

Banking company

35

39

39

Public company other than a banking company

29

29

29

Any other company

29

29

29

Small company (see the Tax credits and incentives section for more information)

21

20

20

In addition to above, super tax is imposed at following rates for tax year 2022 and onwards:

Slabs

2022 & onwards

Income exceeds PKR 150 million but does not exceed PKR 200 million

1

Income exceeds PKR 200 million but does not exceed PKR 250 million

2

Income exceeds PKR 250 million but does not exceed PKR 300 million

3

Where income exceeds PKR 300 million

4

For banking companies, super tax is payable at a rate of 4% irrespective of above slabs for tax year 2022.

Further, where income exceeds PKR 300 million, an enhanced super tax rate of 10% (instead of 4%) shall be applicable for a single year in case of following sectors:

Sectors

Tax year

Banking

2023

Airlines, Automobiles, Beverages, Cement, Chemicals, Cigarettes, Tobacco, Fertilizers, Iron & steel, LNG Terminals, Oil Marketing, Oil Refinery, Petroleum, Gas exploration and production, Pharma, Sugar and Textile

2022

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.

Taxation of a women enterprise

A ‘women enterprise’ is a start-up established on or after 1 July 2021 by women. A company whose 100% shareholding is held or owned by women shall be subject to tax at a reduced rate of 25% on its profit and gains derived from business chargeable to tax under the heading 'income from business'. However, the benefit of this clause will not be available to a business that is formed by the transfer, reconstitution, reconstruction, or splitting up of an existing business.

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

An SME is defined as a person who is engaged in manufacturing and 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 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.

Simplified Tax Regime for Retailers & Specified Service Providers

For retailers (except those defined as Tier – 1) and specified service providers, a ‘final tax’ has been levied on the basis of gross amount billed for commercial electricity connections at the following rates:

 

Gross amount of monthly bills

Tax (PKR)

Where amount does not exceed PKR 30,000

3,000

Where amount exceeds PKR 30,000 but does not exceed PKR 50,000

5,000

Where amount exceeds PKR 50,000 but does not exceed PKR 100,000

10,000

Retailers & service providers specified through general order

200,000

The aforesaid tax shall be collected by the electricity companies through monthly bills in addition to any withholding tax prescribed. However, in case sales tax is collected from such retailers through electricity bills under the federal sales tax law the sales tax will constitute discharge of tax liability.

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 of a non-resident person is subject to ‘minimum tax’ of the gross consideration. Further, in line with the regime applicable for resident service providers, a reduced tax/WHT rate of 3% 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.

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’ section 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 include 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 7%. Consequently, the effective rate of withholding in the instant case shall be 1.4%. This rate is 1% in case of offshore supply contract for an 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. 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 tax liability of a subsequent three tax year. 

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 import stage is minimum tax in case of commercial importers, while 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.

Tax on value of capital assets in Pakistan

A resident person owning immovable property in Pakistan will be taxed on deemed income for tax year 2022 and onwards. Such deemed income shall be computed as 5% of the Fair Market Value of the immovable property. The rate of tax on such income is prescribed as 20%. This translates into an effective tax at 1% of Fair Market Value of immovable property.

 

Certain exclusions have been provided for immovable properties for the purpose of this tax, that includes:

 

  • one immovable property owned by the resident person;

 

  • self-owned business premises from where the business is carried out by the persons appearing on the active taxpayers’ list at any time during the year;

 

  • self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse (defined in a specified manner) and land annexed thereto;

 

  • immovable property allotted to (a) a shaheed or dependents of a shaheed belonging to Pakistan Armed Forces; (b) a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government; (c) a war wounded person while in service of Pakistan armed forces or Federal or provincial government; or (d) an ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority;

 

  • any immovable property from which income is already chargeable to income tax;

 

  • immovable property in the first tax year of acquisition where tax advance tax on purchase has been paid;

 

  • where the fair market value of the immovable property does not exceed PKR 25 million;

 

  • immovable property owned by a provincial government or a local government; or

 

  • immovable property owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Business and Professions.

Super tax

Please refer to ‘Taxes on corporate income’ section above.