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Tax on Royalties in Pakistan – An Overview

Tax on Royalties in Pakistan – An Overview

Introduction

Royalties are a common source of income for creators of intellectual property such as authors, musicians, and inventors. In Pakistan, royalties earned by individuals and companies are subject to tax under the Income Tax Ordinance, 2001. This guide will provide an overview of the tax on royalties in Pakistan, including definitions, rates, and examples.

 

What are Royalties?

Royalties are payments made to the owner of intellectual property for the use of that property by another party. Intellectual property can include patents, copyrights, trademarks, and trade secrets. Royalties are typically paid as a percentage of the revenue generated by the use of the intellectual property.

Taxation of Royalties in Pakistan

In Pakistan, royalties earned by individuals and companies are subject to tax under the Income Tax Ordinance, 2001. The tax is levied on the gross amount of royalties received by the taxpayer during the tax year. The rate of tax depends on the status of the recipient, as well as the nature and source of the royalties.

Tax on Royalties for Resident Individuals

Resident individuals in Pakistan are subject to tax on royalties earned from both domestic and foreign sources. The tax rate for resident individuals is progressive and ranges from 5% to 30%, depending on the amount of royalties earned during the tax year. The following table shows the tax rates applicable to royalties earned by resident individuals:

Royalties Earned (PKR)   Tax Rate

Up to 400,000   5%

400,001 to 800,000        10%

800,001 to 1,200,000     15%

1,200,001 to 2,400,000 20%

2,400,001 to 4,800,000 25%

Above 4,800,000             30%

Tax on Royalties for Non-Resident Individuals

Non-resident individuals in Pakistan are subject to tax on royalties earned from Pakistan sources only. The tax rate for non-resident individuals is a flat rate of 20% on the gross amount of royalties received during the tax year.

Tax on Royalties for Resident and Non-Resident Companies

Resident and non-resident companies in Pakistan are subject to tax on royalties earned from Pakistan sources only. The tax rate for companies is a flat rate of 15% on the gross amount of royalties received during the tax year.

 

Example:

Suppose a resident individual in Pakistan earns PKR 1,000,000 in royalties from a domestic source during the tax year. The tax payable by the individual will be calculated as follows:

Tax Payable = Royalties Earned * Applicable Tax Rate

= PKR 1,000,000 * 15%

= PKR 150,000

Therefore, the resident individual will have to pay a tax of PKR 150,000 on the royalties earned during the tax year.

 

Conclusion

In conclusion, royalties earned by individuals and companies in Pakistan are subject to tax under the Income Tax Ordinance, 2001. The tax rates for resident and non-resident individuals depend on the amount and source of royalties earned, while companies are subject to a flat rate of 15% on Pakistan source royalties. It is important for taxpayers to understand their tax obligations and comply with the tax laws to avoid penalties and legal action.