Taxation in Pakistan

The history of taxation in Pakistan can be traced back to the British colonial period. In 1860, the British government introduced the first income tax law in India, which was later extended to Pakistan after independence in 1947. The current tax system in Pakistan is based on the Income Tax Ordinance of 2001, which was amended several times since its enactment.

The current tax system in Pakistan is based on the Income Tax Ordinance, 1979. The law is divided into 11 parts and 245 sections. The law covers a wide range of topics, including the definition of income, the determination of taxable income, the calculation of tax liability, and the collection of taxes. The tax system in Pakistan is a complex and ever-changing system. The government of Pakistan is constantly making changes to the tax system in an effort to improve revenue collection and to make the system more equitable.

The government of Pakistan has been undertaking a number of tax reforms in recent years. The reforms are aimed at simplifying the tax system, increasing tax compliance, and broadening the tax base. One of the most important tax reforms is the introduction of a dual tax system. The dual tax system is a system in which individuals are taxed on their worldwide income, while companies are taxed only on their income from Pakistan. The government has also introduced a number of measures to improve tax compliance. These measures include the introduction of a withholding tax system, the use of information technology to track tax payments, and the strengthening of the tax administration. The government is also broadening the tax base by bringing more people into the tax net. This is being done by introducing new taxes, such as a tax on capital gains, and by increasing the rates of existing taxes.

Taxation is an important part of any country’s economic system. It is the primary source of revenue for governments to fund public services, infrastructure, and social welfare programs. In Pakistan, taxation plays a critical role in generating revenue and supporting the country’s economic development. This article will explore the impact of taxation on the Pakistani economy, including its benefits, challenges, and opportunities. Taxation is an essential part of Pakistan’s economic system. It plays a vital role in generating revenue, promoting economic growth, and supporting social welfare programs. Despite the challenges, there are several opportunities for taxation in Pakistan, including tax reforms, digitalization, and international cooperation. By addressing the challenges and seizing the opportunities, Pakistan can develop an effective and efficient tax system that supports its economic development.[2]

Taxation in Pakistan is a complex system of more than 70 unique taxes administered by at least 37 agencies of the Government of Pakistan.[3] According to the FBR, in 2021, the number of registered tax filers had grown to 7.1 million out of which only 2.5 million were active tax filers.[4] The FBR has surpassed its collection target by RS 247 billion from July to March of current fiscal year 21-22, which represents increase by 29.1% over the collection of rupees 3,394 billion during the same period last year. On the other hand, gross collections also increased by 28.9%.[5]

In Pakistan, anyone who has earned taxable income during the tax year is required to file a tax return. Taxable income includes salaries, wages, commissions, profits, and other forms of income.[6]

1. Individuals who have a taxable income of more than PKR 600,000
2. Businesses that have a taxable income of more than PKR 300,000
3. Individuals and businesses that have received taxable income from foreign sources
4. Individuals and businesses that have registered their National Tax Number (NTN).
5. Individuals and businesses that have installed commercial meter in their name.
6. Individuals and businesses that have assets registered to their name.

Federal income taxes are administered by the Federal Board of Revenue. The period from July 1 to June 30 is considered as a normal tax year for Pakistan tax law purposes.

Corporate Income tax rates Currently, the Corporate Income tax rate is 29% for tax year 2019 and onwards whereas the corporate tax rate is 35% for Banking Industry for TY 2019.

In addition to Corporate Tax, there are other applicable income taxes including Super Tax, Minimum Tax, and Tax on Undistributed reserves.

Generally, manufacturing business is taxable at Corporate Tax rate whereas trading business and commercial imports business is taxable as "minimum tax". For example, 5.5% withholding income tax is applicable on commercial imports and is payable at the import stage. This 5.5% withholding tax will be considered as minimum tax and Corporate Tax is also applicable, whichever is higher will be the tax liability, on this business.[7] Now Pakistani taxpayers individuals or businesses can use online income tax returns filing websites like TAXApp [8] to submit their returns easily and securely.

According to new Tax Laws (SRO-1006) all tier-1 retailers are required to integrate their POSs with FBR’s real time invoicing system in Pakistan.[9] It is also mandatory for all restaurants to integrate their POSs. These FBR Invoicing system and FBR Integrated POS systems[10] should be able to handle sales, returns and exchanges. Around 11,744 POS terminals have been integrated with the real-time reporting system by July 31, the FBR has announced.

For speeding up the process, the FBR on Aug 9 through SRO1005 (I)/2001 announced a prize scheme to encourage tier-1 retailers to get themselves integrated with the real-time sales reporting system. Many medium- and small-sized tier-1 retailers of various types have yet to integrate their point-of-sale (POS) with the Federal Board of Revenue (FBR) for real-time reporting of sales.To facilitate these Tier 1 retailers in Pakistan with integration and installation of such POS systems Tier3 has launched FBR POS Integration Software – FBR POS.[11] A specialised advance Inventory management and POS system is specially developed for retailers in Pakistan keeping in focus the info security and integrity of data and processes involved.

The Active Taxpayer List (ATL) is a list published by the Federal Board of Revenue (FBR) on the first day of March every year, which includes the names of individuals and entities who have filed their Income Tax Returns for the previous Tax Year within the due date. Inclusion in the ATL provides numerous benefits and privileges to taxpayers, making it a desirable status for taxpayers in Pakistan. In this blog post, we will discuss 15 benefits of being on the Active Taxpayer List.[12]

Indirect tax or more commonly knows as sales tax is also applicable on supply of goods and provision of services. Under the 18th amendment to the Constitution of Pakistan, the right to charge sales tax on services has been given to the provincial governments where as the right to charge sales tax on goods has been given to the federal government. Consequently, provincial revenue authorities were created to manage and collect provincial sales tax in their respective provinces.

Below is a summary of the applicable sales tax rates in Pakistan:

1. Sales tax on goods: 18%
2. Sindh Sales tax on services: 19.5%
3. Punjab Sales tax on services: 16%
4. Balouchistan Sales tax on services: 15%
5. Khyber Pakhtunkhwa (KPK) Sales tax on services: 19.5%
6. Islamabad Capital Territory (Tax on Services): 16%

There are a number of tax deductions and credits available in Pakistan. These can help you reduce the amount of tax you owe. Some of the most common tax deductions and credits include:[13]

1. Medical expenses: You can deduct the cost of medical expenses for yourself, your spouse, and your dependent children.
2. Charitable donations: You can deduct the amount of money you donate to charity.
3. Education expenses: You can deduct the cost of education for yourself, your spouse, and your dependent children.
4. Mortgage interest: You can deduct the interest you pay on your mortgage.
5. Business expenses: You can deduct the cost of goods sold, operating expenses, and other business expenses.

The government of Pakistan has a number of tax collection agencies, including:[14]

1. The Federal Board of Revenue (FBR)
2. The Provincial Revenue Authorities (PRAs)
3. The Customs Department
4. The Excise Department
5. The Social Security Corporation

The tax collection process in Pakistan can be summarized as follows:

1. The government of Pakistan enacts tax laws.
2. The tax collection agencies assess taxes on taxpayers.
3. Taxpayers file tax returns with the tax collection agencies.
4. The tax collection agencies collect taxes from taxpayers.
5. The tax collection agencies remit taxes to the government of Pakistan.

According to a 2002 study, 99% of 256 respondents reported facing corruption with regard to taxation. Furthermore, 32% of respondents reported paying bribes to have their tax assessment lowered, and nearly 14% reported receiving fictitious tax assessments until a bribe was paid.[15]

Tax evasion is the intentional non-payment or underpayment of taxes owed to the government. It can be committed by individuals, businesses, or other organizations. There are many different ways to commit tax evasion, including:

• Failing to file tax returns
• Filing false tax returns
• Underreporting income
• Overstating deductions
• Claiming fraudulent credits or deductions

The penalties for tax evasion in Pakistan are severe. They can include:

1. Fines
2. Imprisonment
3. Asset forfeiture

The amount of the fine or the length of the prison sentence will depend on the severity of the offense. For example, someone who fails to file a tax return may be fined up to Rs. 50,000, while someone who commits fraud may be sentenced to up to 10 years in prison.[16]

• The FBR website has a wealth of information about taxes in Pakistan. You can find information about filing your taxes, tax deductions and credits, and tax penalties.
• The Tax Reform Commission of Pakistan is a government body that is responsible for reforming the tax system in Pakistan. The commission’s website has information about the commission’s work and its proposals for reform.
• TaxationPk provides education and training on taxation in Pakistan. The Company’s website has information about courses, seminars, and other resources.