Pakistan

Corporate - Taxes on corporate income

Last reviewed - 25 July 2020

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 (for tax year 2021) are as follows:

Company type Tax rate (%)
Banking company 35
Public company other than a banking company 29
Any other company 29
Small company (see the Tax credits and incentives section for more information) 22

The future tax rates applicable for ‘companies’ and ‘small companies’ will be as follows:

Tax year Company rate (%) Small company rate (%)
2021 29 22
2022 29 21
2023 and onwards 29 20

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.

 In the case of a modaraba (see the Income determination section for a definition), income, except relating to trading and manufacturing activities, is exempt from tax, provided that 90% of its profit is distributed to the certificate holders as cash dividends. Modarabas qualifying for such exemption are also exempt from imposition of minimum tax @ 1.5% on turnover.

 The rate of withholding tax for certain transactions, which currently prescribe an increased rate for non-filers, has been enhanced by 100% for persons not appearing on Active Taxpayers List.

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 trading 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/withholding tax rate of 3% is also applicable with respect to certain specified services rendered by permanent establishment 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.

Minimum tax provisions on turnover basis is now been applicable on Permanent Establishments of the non-residents. The rate of tax on turnover is 1.5%.

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.

Minimum tax on turnover

Where the tax payable by a company is less than 1.5% of the turnover, the company is required to pay a minimum tax equivalent to 1.5% of the turnover. In certain cases/sectors, such turnover tax is payable at rates less than 1.5% (ranging from 0.25% to 0.75 % of turnover).

Tax paid in excess of normal tax liability can be carried forward for adjustment against tax liability of a subsequent tax year. However, such tax can only be adjusted against tax liability of the five tax years immediately succeeding the tax year for which the amount was paid.

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, income taxable under the FTR, 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.

Super tax

Super tax is presently leviable only upon banking companies @ 4% for tax year 2021.

Local taxes on income

No provincial or local taxes are payable in respect of income of companies, other than agricultural income tax, which is subject to tax under the respective provincial laws.

Taxation of Builders and Developers

The key benefits available to builders and developers who fulfills certain conditions given in the newly introduced section 100D are as under:

i. A scheduler based fixed tax regime for builders and developers, which can be opted for eligible projects being either new or existing incomplete projects.
ii. The tax authorities are not permitted to require any explanation regarding the nature and source of capital investments in new projects by investors and to the first purchasers of building including units therein in new and existing incomplete projects and for plot purchasers.
iii. Facility for builders and developers to incorporate their profits and gains in books of accounts up to ten times the amount of fixed tax paid under the regime on eligible projects.
iv. Exemption from tax on Dividend distributed by Corporate builder or developer out of the profits and gains of eligible projects, with specific exemption from tax withholding on such distribution.
v. Builders and developers absolved from withholding tax under section 153 of the Ordinance on purchase of materials (except steel and cement) and services (plumbing, electrification, shuttering and other similar and allied services) provided by non-corporate service providers.

 

Rate in respect of

(1)

(2)

(3)

(4)

Area in

Karachi, Lahore and Islamabad

Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbotabad, Quetta

Urban Areas not specified in column (2) and (3)

Tax on Builders – For Commercial Buildings

Any size

Rs. 250 per sq. ft.

Rs. 230 per sq. ft.

Rs. 210 per sq. ft.

Tax on Builders – For Residential Buildings

Up to 3,000 sq. ft.

Rs 80 per sq. ft.

Rs 65 per sq. ft.

Rs 50 per sq. ft.

3,000 sq. ft. and above

Rs 125 per sq. ft.

Rs 110 per sq. ft.

Rs 100 per sq. ft.

Tax on Developers (Entire Project)

Any size

Rs 150 per sq. yd.

Rs 130 per sq. yd.

Rs 100 per sq. yd.

For Development of Industrial Area

Any size

Rs 20 per sq. yd.

Rs 20 per sq. yd.

Rs 10 per sq. yd.