Tax Exemptions in Pakistan

ax exemptions play a critical role in shaping a country’s economic and fiscal policy. In Pakistan, various types of tax exemptions are granted to promote investment, support specific industries, encourage exports, attract foreign remittances, and provide relief to underprivileged sectors. These exemptions may apply to income tax, sales tax, customs duty, and federal excise duty. Understanding who qualifies for these exemptions and under what conditions is essential for individuals, companies, and non-profit organizations operating in Pakistan. This article outlines the types, scope, eligibility criteria, and legal provisions of tax exemptions in Pakistan.

Legal Framework Governing Tax Exemptions

Tax exemptions in Pakistan are provided under various legal instruments, including:

• Income Tax Ordinance, 2001

• Sales Tax Act, 1990

• Customs Act, 1969

• Federal Excise Act, 2005

• Annual Finance Acts

• Special Economic Zone (SEZ) Act

• Notifications, circulars, and SROs (Statutory Regulatory Orders) issued by FBR

Types of Tax Exemptions in Pakistan

1. Income Tax Exemptions

These exemptions apply to income earned by certain individuals, organizations, or sectors.

a. Individual and Salary-Based Exemptions

• Annual salary threshold exemption for individuals earning below PKR 600,000

• Tax credit on investments in mutual funds, pension funds, life insurance (Section 62)

• Zakat deduction as per Zakat & Ushr Ordinance

• Exemption of agriculture income under Section 41 (subject to provincial tax)

• Foreign-source income for non-resident Pakistanis (under specified conditions)

b. Sector-Based Income Exemptions

• Information Technology (IT) and IT-enabled services (ITES):

  • 100% exemption for registered PSEB companies till June 2026

  • Tax credit under Section 65F subject to export proceeds through banking channels

• Exporters:

  • Reduced final tax regime under Section 154

  • Exemption on export of software, garments, sports goods

• Renewable energy companies:

  • Tax exemption for 10 years under specific policies (solar, wind, hydel)

• Startups registered with SECP and PSEB:

  • 3-year tax exemption under Section 100 of the Income Tax Ordinance

  • Must meet conditions of innovation and tech orientation

c. Non-Profit Organizations (NPOs)

• Exempt under Section 100C

• Registered under Section 2(36) of the Income Tax Ordinance

• Required to file tax returns and maintain transparent accounts

• Exemption applies only if 75% of income is used for charitable purposes

d. Foreign Remittances

• Foreign remittances sent through banking channels are exempt from tax

• No tax on income remitted under the Foreign Exchange Remittance Card (FERC)

• Exemption under Section 111(4) of the Income Tax Ordinance

e. Diplomatic Missions and International Organizations

• Embassies, UN agencies, and certain donor-funded organizations are tax-exempt

• Conditions governed under international treaties and SROs

2. Sales Tax Exemptions

a. Goods Exempt from Sales Tax (Under Sixth Schedule of Sales Tax Act, 1990)

• Unprocessed food items (flour, pulses, fresh milk)

• Educational books and stationary items

• Life-saving drugs and medical equipment

• Renewable energy equipment (solar panels, wind turbines)

• Machinery for agriculture and textile sectors

b. Sector-Specific Exemptions

• Exporters: Zero-rated under Fifth Schedule, enabling input tax refund

• Charitable institutions and hospitals: Sales tax exemptions on donations

• Online marketplaces providing intermediary services (subject to specific thresholds)

c. Provincial Sales Tax on Services (PST)

Each province provides exemptions under its own Sales Tax Acts. Common examples include:

• Educational and healthcare services

• Charitable trust services

• Exported services (zero-rated or exempt)

• Home-based or cottage industries (below threshold turnover)

3. Customs Duty Exemptions

a. Machinery and Raw Material Imports

• Exemptions for plant and machinery under various SROs

• Sectoral exemptions for textile, agriculture, and pharmaceutical industries

• Incentives for Greenfield industrial undertakings

• Duty-free import of equipment under Export-Oriented Units (EOU) Scheme

b. Free Trade Agreements (FTAs)

• Imports from China, Malaysia, Sri Lanka, etc., under FTA provisions qualify for reduced or zero customs duty

• Conditions include valid Certificate of Origin and classification compliance

c. CPEC and SEZ Exemptions

• Imports under CPEC projects are exempt from customs duties

• SEZ-based companies enjoy duty-free import of capital goods

4. Federal Excise Duty (FED) Exemptions

• Exemption on services already taxed under provincial laws

• Small manufacturers below threshold are exempt

• Exported goods are generally not subject to FED

• Relief for cottage industries and home-based producers

Exemption Through Tax Credits

Rather than outright exemptions, many businesses qualify for tax credits which reduce liability.

Common Tax Credits Include:

• Tax credit for new industrial undertakings under Section 65D

• Tax credit for investment in plant and machinery under Section 65B

• Tax credit for employment generation under Section