Income tax is a tax imposed on the income earned by individuals, companies, and other entities. In Pakistan, income tax is governed by the Income Tax Ordinance, 2001, and its rules and regulations. In this guide, we will provide a comprehensive overview of income tax in Pakistan, including its definitions, rates, and examples.
Income Tax Definitions
Income:
Income is defined as any money, property, or other valuable consideration received by an individual, company, or other entity during a tax year. It includes salaries, wages, rent, dividends, capital gains, and any other income.
Tax Year:
The tax year in Pakistan runs from July 1 to June 30 of the following year.
Taxpayer:
A taxpayer is an individual, company, or other entity that is subject to income tax in Pakistan.
Taxable Income:
Taxable income is the income that is subject to income tax after allowable deductions and exemptions.
Taxable Person:
A taxable person is an individual or company that is required to pay income tax in Pakistan.
Income Tax Rates in Pakistan
The income tax rates in Pakistan vary depending on the type of taxpayer and the amount of taxable income. The following are the income tax rates for individuals, companies, and associations of persons (AOPs) for the tax year 2022:
Individuals:
Income up to PKR 600,000: Exempt from income tax
Income from PKR 600,001 to PKR 1,200,000: 5% of the amount exceeding PKR 600,000
Income from PKR 1,200,001 to PKR 2,400,000: PKR 30,000 + 10% of the amount exceeding PKR 1,200,000
Income from PKR 2,400,001 to PKR 4,800,000: PKR 150,000 + 15% of the amount exceeding PKR 2,400,000
Income from PKR 4,800,001 to PKR 7,200,000: PKR 450,000 + 20% of the amount exceeding PKR 4,800,000
Income from PKR 7,200,001 to PKR 10,000,000: PKR 810,000 + 25% of the amount exceeding PKR 7,200,000
Income above PKR 10,000,000: PKR 1,560,000 + 29% of the amount exceeding PKR 10,000,000
Companies:
Companies that are not in the business of trading: 20% of taxable income
Companies that are in the business of trading: 29% of taxable income
Small companies with a turnover of up to PKR 250 million: 20% of taxable income
Newly established companies in the first three years of business: 20% of taxable income
Associations of Persons (AOPs):
29% of taxable income
Income Tax Examples
Example for an Individual Taxpayer:
Suppose Ali, a salaried employee, earned a gross salary of PKR 1,500,000 during the tax year 2022. Ali has made the following deductions:
House Rent Allowance: PKR 120,000
Medical Allowance: PKR 60,000
Provident Fund: PKR 180,000
Zakat: PKR 30,000
Ali’s taxable income will be calculated as follows:
Gross Salary: PKR 1,500,000
Less: Deductions
Rent Allowance: PKR 120,000
Medical Allowance: PKR 60,000
Provident Fund: PKR 180,000
Zakat: PKR 30,000
Total Deductions: PKR 390,000
Taxable Income: PKR 1,500,000 – PKR 390,000 = PKR 1,110,000
Ali’s income tax liability will be calculated as follows:
PKR 30,000 (5% of PKR 1,110,000 – PKR 600,000) + PKR 30,000 (10% of PKR 1,200,000 – PKR 600,000) + PKR 90,000 (15% of PKR 1,110,000 – PKR 2,400,000) = PKR 150,000
Therefore, Ali’s income tax liability for the tax year 2022 will be PKR 150,000.
Example for a Company Taxpayer:
Suppose XYZ Company earned a taxable income of PKR 5,000,000 during the tax year 2022. XYZ Company is in the business of trading, so the income tax rate for the company will be 29%.
XYZ Company’s income tax liability will be calculated as follows:
PKR 1,450,000 (29% of PKR 5,000,000) = PKR 1,450,000
Therefore, XYZ Company’s income tax liability for the tax year 2022 will be PKR 1,450,000.
Conclusion
In conclusion, income tax is an essential source of revenue for the government of Pakistan. The income tax rates and rules are subject to change, and it is essential to keep track of any updates to avoid any penalties or fines. The government has made efforts to simplify the tax system and encourage taxpayers to file their tax returns regularly. It is advisable to consult a tax expert or a financial advisor to help you navigate the income tax system in Pakistan.
