Taxation of Hospitality Services in Pakistan

The hospitality sector in Pakistan—which includes hotels, restaurants, guesthouses, motels, event venues, and catering services—has experienced substantial growth due to domestic tourism, international business travel, and rising consumer demand for dining and leisure experiences. This sector is a significant contributor to the economy and is subject to a range of taxes administered by both federal and provincial authorities.

This article explains the taxation framework for hospitality services in Pakistan, covering income tax, sales tax on services, withholding tax, and other applicable obligations. It also highlights key compliance requirements and sector-specific challenges.

Tax Authorities Overseeing Hospitality Sector

1. Federal Board of Revenue (FBR)

• Governs income tax and sales tax on goods

• Oversees withholding tax compliance

2. Provincial Revenue Authorities

Each province levies Sales Tax on Services under its own law and rate:

Income Tax on Hospitality Services

Applicability

All hospitality service providers—including hotels, restaurants, banquet halls, and caterers—are subject to income tax under the Income Tax Ordinance, 2001.

Tax Rates

• Companies: 29% corporate tax (Tax Year 2025)

• AOPs or Individuals: Taxed on progressive slabs (up to 35%)

• Minimum tax under Section 113 applies at 1.25% of turnover if no or low taxable income

• Quarterly advance tax under Section 147 may be applicable

Allowable Deductions

Hospitality businesses can deduct:

• Staff salaries and wages

• Food and beverage purchases

• Rent and utilities

• Maintenance, marketing, and software costs

• Depreciation on buildings and equipment

• Hotel furniture, linens, and interior design costs

Filing Requirements

• Annual income tax return

• Wealth statement (individuals)

• Audited financials (if turnover exceeds Rs. 100 million or paid-up capital is above Rs. 10 million)

• Quarterly advance tax payments (companies and AOPs)

Sales Tax on Hospitality Services

Hospitality services are fully taxable services under all provincial sales tax laws.

Taxable Hospitality Services

• Room rental by hotels, motels, inns, guesthouses

• Restaurant and catering services

• Event/banquet hall rental

• Club services and member subscriptions

• Accommodation packages with food and beverage

• Wedding planning and event management

• Allied services such as valet, laundry, or Wi-Fi (if separately charged)

Sales Tax Rates by Province

Filing Obligations

• Monthly Sales Tax Return by 18th of each month

• Sales tax invoices must be issued for each taxable service

• Input tax adjustment allowed for purchases like food items, cleaning materials, crockery, etc.

• Separate registration required in each province of operation

Invoicing Consideration

• Itemized invoices must clearly show room charges, service charges, GST, and discounts

• Bundled packages must be proportionally taxed if food and accommodation are combined

Withholding Tax in the Hospitality Sector

Hotels and restaurants, especially large businesses or franchises, may act as withholding agents and are also subject to deductions by customers.

As Payers

They must deduct and deposit tax on:

• Salaries (Section 149)

• Rent of premises (Section 155)

• Contractor services (Section 153)

• Professional consultants (Section 153(1)(b))

• Utility bills (Section 235)

• Commission or service charges to travel agents (Section 233)

As Payees

Corporate clients paying for hotel or catering services may deduct:

• 8% to 10% withholding tax under Section 153(1)(b)

• Applicable on gross payments (excluding GST if itemized)

Filing Obligations

• Monthly withholding tax statements

• Challan deposits via FBR Iris portal

• Annual reconciliation of withholding taxes deducted and paid

Food and Beverage Sales

Taxation

• Food sold within restaurants: Subject to provincial sales tax on services

• Takeaway and delivery: Also taxed as restaurant services in most provinces

• Sale of packaged goods (e.g., bottled water): Subject to FBR sales tax on goods at 18%

If a business deals in both goods and services, dual registration with FBR and provincial authority may be required.

Special Considerations for Hotels and Guesthouses

Input Tax Apportionment

Hotels offering both exempt and taxable services (e.g., foreign diplomats, non-resident guests) must apportion input tax accordingly.

Foreign Guests

• Room charges billed to foreign diplomats may be zero-rated or exempt, depending on diplomatic protocols

• Tourist facilitation services may be eligible for tax incentives under tourism promotion schemes

Event Services

• Rentals for halls and event spaces are taxable at standard service tax rates

• Wedding packages must disclose split between services for proper tax treatment

Online Booking Platforms and Aggregators

Platforms such as Booking.com, Jovago, or Airbnb (if operating locally or via a partner) may be subject to:

• Sales tax on commission/fee

• Income tax on remittances or earnings

• Reverse charge mechanism if payments go to offshore platforms

Hotels partnering with such platforms must issue proper invoices and record commission expense and tax deducted.

Tax Compliance Checklist for Hospitality Providers

Penalties for Non-Compliance

Authorities may also conduct audit and enforcement actions, leading to business license suspension or bank account freezing in serious cases.

Recommendations for Hospitality Businesses

• Register with FBR and Provincial Revenue Authorities

• Digitize billing and recordkeeping

• Issue itemized, tax-inclusive invoices to all customers

• Deduct and deposit withholding taxes where applicable

• File all returns (sales tax, income tax, withholding) on time

• Engage a tax advisor to ensure proper input tax claims and apportionments

• For expanding businesses, consider ERP software integration for compliance

Conclusion

The hospitality sector in Pakistan is under strict tax scrutiny due to its high turnover and consumer-facing nature. Hotels, restaurants, and catering services are fully taxable under both income tax and provincial sales tax regimes. To remain compliant and competitive, hospitality service providers must maintain transparent records, file timely returns, and correctly charge taxes to customers.

Whether operating as a boutique hotel, franchise restaurant, or full-service event venue, understanding and fulfilling tax obligations is essential to avoid penalties and ensure sustainable business growth.