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:: Tax Law in Pakistan
Virtually every business decision today has tax consequences. You deserve the most practical, tuned-in and well-crafted tax solutions. We provide a comprehensive range of services from the completion of tax returns under corporation tax, self assessment to complex consultancy assignments and strategic tax planning.
Our ability to focus on our clients and deliver innovative tax solutions is enhanced by our knowledge of specific business environments including financial services, leisure, retail, sport, high growth companies, manufacturing and automotive, technology and communications, public sector, property and utilities. We also have a number of specialist tax groups who deal with specific complex areas of tax law.
Our consultants can help you plan, grow and structure your business. We are known for our straightforward approach to solving our clients' most complex business challenges. We work hand-in-hand with clients to improve business performance, drive shareholder value and create competitive advantage.
Our Services include:
Corporate and individual tax planning including of Trusts, Cooperative Societies and NGOs.
Compliance services including preparation of income tax and sales tax returns and Customs clearance.
Representing clients before tax authorities and assisting in preparing appeals to the Tribunals, High Courts and Supreme Court.
International Tax Consultancy including tax on international transactions and advising on double taxation treaties.
Assisting with sales tax matters including registration, de-registration and assessment.
Obtaining Advance Ruling on proposed investments or business transactions.
Establishing gratuity funds, provident funds and other employees benefit schemes and their approval from tax authorities.
Providing general tax advice based on current and evolving laws and rulings.
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TAX LAW SYSTEM IN PAKISTAN
Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below:
Direct Taxes
Direct taxes primarily comprise income tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads:
Salaries
Interest on Securities
Income from Property
Income from Business or Profession
Capital Gains
Income from Other Sources
Personal Tax
All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates ranging from 10 to 35 per cent.
Tax on Companies
All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 35%. However, the effective rate is likely to differ on account of allowances and exemptions related to industry, location, exports, etc.
Wealth Statement u/Sec. 116
Wealth Statement u/Sec. 116 is compulsory, where declared income is Rs. 500,000/- or more.
Tax u/Sec. 153(8A) (omitted)
Now, where NTN/CNIC is not available, the excess tax @ 2% shall not be collected.
Inter-Corporate Dividend Tax
Tax on the dividends received by a public company from a Pakistan company is payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inter-corporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e. 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of this source of income.
Treatment of Dividend Income
Dividend income received as below, enjoys tax exemption, provided it does not exceed Rs. 10,000/-.
Dividend received by non-resident from the state enterprises Mutual Fund set by the Investment Corporation of Pakistan.
Dividends received from a Domestic Company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue.
Unilateral Relief
A person resident in Pakistan is entitled to a relief in tax on any income earned abroad, if such income has already been subjected to tax outside Pakistan. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad, whichever is lower.
Customs
Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery and raw material lower than those on consumer goods.
Federal Excise
Federal Excise duties are leviable on a limited number of goods produced or manufactured, and services provided or rendered in Pakistan. On most of the items Federal Excise duty is charged on the basis of value or retail price. Some items are, however, chargeable to duty on the basis of weight or quantity. Classification of goods is done in accordance with the Harmonized Commodity Description and Coding System which is being used all over the world. All exports are exempted from Federal Excise Duty.
Sales Tax
The following personnel shall make an application in the Form STR-1, transmitted to the CRO “Central Registration Office” electronically or through registered mail or courier services for registration under Sales Tax Rules, 2006, Chapter I “Registration, compulsory Registration and De-Registration” as per following conditions:
PERSON
CONDITION
LIABILITY EXEMPTION
Manufacturer
Value of Taxable supplies does not exceed Rs. 5,000,000 in any period during the last twelve month or whose annual utility bills does not exceed Rs 600,000 during the last 12 months.
Supplies will be exempted under Sr. 42 of the Sixth Schedule.
Retailer
Value of supplies does not exceed Rs. 5,000,000 in any period during the last twelve month.
Supplies will be exempted under Sr. 42 of the Sixth Schedule.
Importer
Person is liable to be Registered.
Wholesaler / Supplier including Dealer and Distributor
Person is liable to be Registered.
As per newly inserted Section 8B of the Act, a registered person is restricted to claim adjustment of input tax to the extent of ninety percent of output tax for that tax period. Further, it permits the adjustment of input charged in acquisition of fixed assets in twelve equal monthly installments after the start of production of a new unit. The Board is empowered to exclude any person from the above purview.
However, the input tax inadmissible in excess of 90% of the output tax, may be allowed on yearly basis in the second month following the end of the financial year of the registered person subject to the following condition namely:
In case of a registered person whose accounts are subject to audit under the Companies Ordinance, 1984 upon furnishing a statement along with annual audited accounts duly certified.
In other cases, adjustment may be allowed as per specific notification issued by the Board.
Time of Supply
Sales Tax was taxable at the earlier of the time of delivery of goods or when any payment is received by the supplier in respect of such supply. If has now been restricted only to the time of delivery of goods by the supplier irrespective of the actual time of payment.
Through newly inserted subsection (1A) of Section 23, the Board is empowered to restrict a registered person to use as many number of business bank accounts as may be specified.
As per amendment in Section 24 of the Act, retention of record and documents by a registered person has been enhanced from three years to five years.
A new concept of Withholding Agent has been introduced through SRO No 550(1)/2007, dated 30th June, 2007 wherein a withholding agent shall deduct as amount equal to one fifth (1/5th) of total sales tax shown in the sales tax invoice issued by the supplier and make payment of the balance amount to him.
Default Surcharge
For first six months 1% per month
For subsequent period till the final payment 1.5% per month
In case of tax fraud till the final payment 2% per month
Offence and Penalties
OFFENCES
PENALTIES
SECTION REFRENCE
Non filing of returns
Five thousand rupees within fifteen days, one hundred rupees for each day of default
Sec. 26
Non issuance of invoices
Five thousand rupees of five percent of the amount which ever is higher
Sec. 23
Issuance of invoices without authority
Ten Thousand rupees or five percent of the amount which ever is higher
Sec. 3, 7 and 23
Non notification change in the particulars of registration
Five Thousand rupees
Sec. 14
Failure of deposit the amount of tax due
Ten Thousand rupees or five percent of the amount whichever is higher
Within fifteen days, give hundred rupees each day of default. No penalty for miscalculation.
Non payment and imprisonment for three year or both
Sec. 3, 6, 7 and 48
Repeation of miscalculation for less tax during the year
Ten Thousand rupees or three percent of the amount whichever is higher
Non filing of application registration
Ten Thousand rupees or five percent of the amount whichever is higher
Non filing after sixty days conviction and imprisonment for three years
Non maintenance of records
Ten Thousand rupees or five percent of the amount whichever is higher
Non compliance with Section 25
Five Thousand rupees
Sec. 25
Receipt of second notice
Ten Thousand rupees
Receipt of third notice
Fifteen Thousand rupees
Non filing of information required by the board
Ten Thousand rupees
Sec. 26
Filing of false documents
Destruction / alteration of record
Making of false statement
Twenty Five Thousand rupees or one hundred percent of the amount whichever is higher. Conviction and imprisonment of three years or with both
Sec. 2 (37) and General
Obstruction of Sales Tax Officer
Twenty Five Thousand rupees or one hundred percent of the amount whichever is higher. Conviction and imprisonment of three years or with both
Sec. 25, 38 and 38A
Abetment in commissioning of tax fraud
Twenty Five Thousand rupees or one hundred percent of the amount whichever is higher. Conviction and imprisonment of three years or with both
Sec. 2 (37)
Violation of any embargo placed or removal of goods in connection with recovery of tax
Twenty Five Thousand rupees or one hundred percent of the amount whichever is higher. Conviction and imprisonment of three years or with both
Sec. 48
Obstructions of Sales Tax Officer
Twenty Five Thousand rupees or one hundred percent or three percent of he amount whichever is higher
Sec. 31 and General
Non compliance with Section 73
Five thousand rupees or three percent of the amount whichever is higher
Sec. 73
Non fulfillment of notification issued under any of the provisions of this Act
Five Thousand Rupees of three percent of the amount whichever is higher
Sec. 71 and General
Sales Tax officer causing loss to the sales tax revenue
Convection and imprisonment for three year or five equal to tax, or with both
General
Contravention with provision of this act and no penalty has been provided
Five Thousand Rupees or three percent of the amount, which ever is higher
General
Non filing of the summary of sale or purchase invoices
Twenty Five Thousand Rupees
Sec. 26(5)
Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on:
All goods imported into Pakistan, payable by the importers;
All supplies made in Pakistan by a registered person in the course of furtherance of any business carried on by him; and
There is an in-built system of input tax upto 90% adjustment and a registered person can make this adjustment of tax paid at earlier stages against the tax payable by him on his supplies. The tax paid at any stage does not exceed 15% of the total sales price of the supplies.
Performing a High Quality Audit
In today's ever changing global economy, businesses need trusted advisers. Our audit specialists take the time to understand your business as well as the industry in which you operate, whether it is in Pakistan and/or abroad.
Our audit approach focuses on understanding the clients’ business and control issues from the inside out. It combines a rigorous risk assessment, diagnostic processes, and audit testing procedures as well as a continuous assessment of our clients’ service performance. Our state of the art, audit tool, Audit System supports all phases of the audit process including planning, executing, reporting.
Investment Advisory Services
All investment carries some risk and thus needs careful analysis and expert advice. The key to be a successful investor is to achieve appropriate risk/return trade off by identification of risks that exist and their proactive management.
Our Investment Advisory Service professionals specialize in identifying risks arising from regulation, competition and macro economic forces and designing strategies to manage it to your advantage. Our range of services includes:
Advice on analyzing investment prospects and mode of doing business in Pakistan including advising on the form of legal entity, incorporation, obtaining of necessary permissions and help in dealing with local regulators.
Identification of suitable business partners and conducting due diligence.
Feasibility studies including preparation of projected financial statements and project.
Appraisal through NPV, IRR, Payback and DCF analysis including cost assessment and revenue projections.
Sensitivity analysis
Tariff and pricing studies
NOTE:
The contents as narrative above are subject to change through annual amendment.
