Taxation of Investment Advisory Services in Pakistan

Investment advisory services have grown significantly in Pakistan over the past decade, driven by increasing investor interest in capital markets, mutual funds, real estate, and diversified asset classes. Investment advisors provide professional guidance on how to allocate capital for optimum returns while managing risk. As this sector expands, so does the need to understand its taxation framework. In Pakistan, investment advisory services fall under the purview of both federal and provincial tax authorities, depending on the nature and scope of the service. This article offers a comprehensive guide to the taxation of investment advisory services in Pakistan, covering income tax, sales tax on services, withholding tax obligations, and compliance requirements imposed by regulatory bodies like the Federal Board of Revenue (FBR) and the Securities and Exchange Commission of Pakistan (SECP).

Definition and Scope of Investment Advisory Services
Investment advisory services in Pakistan are defined under the Non-Banking Finance Companies (NBFC) and Notified Entities Regulations, 2008, regulated by SECP. These services typically include personalized financial planning, asset allocation advice, risk profiling, portfolio management, and guidance on mutual funds, equities, and fixed-income instruments. Investment advisors may operate as independent consultants, part of NBFCs, or under asset management companies (AMCs). As they earn revenue from commissions, management fees, consultancy charges, or advisory retainers, they become subject to various tax obligations under federal and provincial laws.

Income Tax Treatment under the Income Tax Ordinance, 2001
Income generated by investment advisory services is subject to income tax under the Income Tax Ordinance, 2001. The key considerations include:

Business Income Classification
The earnings from advisory fees, portfolio management, or consultancy are considered business income under Section 18 of the Income Tax Ordinance. The advisory firm or individual must file an annual income tax return and declare all receipts, expenses, and profits.

Applicable Tax Rates
For companies providing investment advisory services, the corporate income tax rate is generally 29% (2025). For sole proprietors or partnerships, income tax is levied on a progressive slab basis, depending on the total taxable income of the individual.

Minimum Tax under Section 113
If the investment advisor reports a low or zero net profit, a minimum tax is still payable under Section 113 of the Income Tax Ordinance. The current rate is 1.25% of turnover unless the taxpayer qualifies for an exemption or reduced rate.

Deductible Business Expenses
Advisors can claim deductions for allowable expenses incurred in generating income. These may include office rent, employee salaries, marketing costs, IT subscriptions, and professional development. Proper documentation and bookkeeping are essential to support these deductions during audits.

Tax Credit for Investment in Stocks or Mutual Funds
Under Section 62 of the Ordinance, individuals can claim a tax credit for investing in listed securities or mutual funds, subject to certain conditions. While this is applicable to clients, advisors must be aware of it when guiding their clients on tax-efficient investing.

Advance Tax Payments
Investment advisors with significant turnover are required to pay advance tax quarterly under Section 147. Failure to comply can lead to penalties and default surcharge.

Sales Tax on Services (Federal and Provincial)
Investment advisory services are considered taxable services and subject to Sales Tax on Services, but the applicable authority depends on the geographic location and mode of service delivery.

Islamabad Capital Territory (ICT)
In ICT, services are taxed under the Federal Excise Act, 2005, where sales tax on services is collected by the FBR. As per the latest regulations, investment advisory services are taxed at 16% in Islamabad. Advisors based in ICT must register with the FBR, issue sales tax invoices, and file monthly returns.

Punjab
Under the Punjab Sales Tax on Services Act, 2012, investment advisory services are taxable at a rate of 16%, administered by the Punjab Revenue Authority (PRA). Advisors operating in Punjab must obtain registration with PRA, file monthly returns, and maintain proper invoicing and record-keeping systems.

Sindh
The Sindh Revenue Board (SRB) imposes 13% sales tax on investment advisory services under the Sindh Sales Tax on Services Act, 2011. If the service recipient resides in Sindh or the service is delivered within Sindh, it falls under SRB jurisdiction. SRB also allows e-filing and e-payment of tax obligations.

Khyber Pakhtunkhwa (KP)
Under the Khyber Pakhtunkhwa Finance Act, 2013, advisory services are taxed at 15% and regulated by the KP Revenue Authority (KPRA). KPRA registration is mandatory for service providers operating in Peshawar or other cities within the province.

Balochistan
The Balochistan Revenue Authority (BRA) levies 15% sales tax on advisory services under the Balochistan Sales Tax on Services Act, 2015. Like other provincial bodies, BRA mandates monthly filings and imposes strict penalties for non-compliance.

Determining Place of Supply and Tax Jurisdiction
A critical aspect of service tax compliance is identifying the place of supply, which determines whether FBR or a provincial authority has jurisdiction. Key rules include:

• If the service provider and recipient are both located in the same province, that province’s tax rate and rules apply.

• If the provider is in one province and the client in another, dual jurisdiction disputes may arise, especially in cross-border or digital advisory services.

• Services delivered electronically or via remote consultation may still attract local tax if the client resides in the province.

Advisors must carefully examine their client base and service delivery channels to determine which authority they must register and comply with.

Withholding Tax Obligations
Investment advisory firms may also be subject to withholding tax obligations, both as payers and payees.

As Payees (Recipients of Income)
When advisory fees are paid by corporate clients, they are often subject to withholding under Section 153(1)(b) of the Income Tax Ordinance. The current rate is 10%, adjustable against the final tax liability. However, if the advisory firm is a company and provides a tax exemption certificate under Section 153, the withholding may be reduced or exempt.

As Payers (Making Payments to Others)
Advisory firms making payments to vendors, consultants, or non-salaried staff are required to withhold income tax under various provisions:

• Section 153 for payments to service providers

• Section 149 for employee salaries

• Section 155 for rent
  Failure to deduct and deposit withholding taxes leads to penalties, default surcharge, and disallowance of expense under Section 21.

SECP Licensing and Regulatory Compliance
Investment advisory services in Pakistan must be registered with the SECP under the NBFC Regulations. Key requirements include:

• Certificate of Incorporation as a Private Limited Company

• Application for Investment Advisor License

• Appointment of qualified and fit-and-proper individuals

• Maintenance of a compliance officer and internal control systems

• Regular filing of audited financial statements and activity reports
  Failure to obtain a license can result in heavy fines, legal action, and blacklisting by SECP.

Record-Keeping and Audit Requirements
To comply with both tax and regulatory obligations, investment advisors must maintain:

• Detailed client records and advisory logs

• Service invoices with proper sales tax breakdown

• Income and expense ledgers

• Tax payment challans and return filings

• Bank statements for income verification
  These records should be retained for at least six years and made available during tax audits or SECP inspections.

Exemptions and Special Regimes
While investment advisory services are generally taxable, certain exemptions may apply in specific scenarios:

• Export of advisory services (to foreign clients): May be zero-rated for sales tax, subject to documentation under FBR or provincial rules.

• Non-profit advisory entities: May qualify for tax exemptions if registered under Section 2(36) of the Income Tax Ordinance.

• SECP grants: In some cases, the SECP may exempt startups from licensing fees for a limited period to promote financial inclusion.

Digital and Cross-Border Tax Considerations
With the rise of digital platforms, many investment advisors offer services through apps, webinars, or overseas Zoom consultations. In such cases:

• FBR may treat these as export of services, which are subject to zero sales tax if remittance is received through proper banking channels.

• Provincial authorities may still try to levy service tax if the client is based locally.

• Double Taxation Agreements (DTAs) may apply for advisors earning from clients abroad.
  Professional tax consultation is essential in such scenarios to avoid overlapping tax liabilities.

Penalties for Non-Compliance
Tax authorities impose significant penalties for non-compliance, including:

• Late filing penalty: Rs. 2,500 to Rs. 25,000 per return

• Non-registration: Penalty up to Rs. 100,000

• Non-payment or underpayment of taxes: 100% of the short-paid amount

• Audit adjustments: Additional taxes, penalties, and default surcharges
  Investment advisors are urged to ensure full compliance to avoid reputational and financial loss.

Conclusion
The taxation of investment advisory services in Pakistan involves multiple layers, covering income tax, sales tax on services, and withholding obligations. With separate tax regimes for each province and the federal government, investment advisors must maintain strict compliance to avoid penalties and litigation. Proper registration with SECP, accurate invoicing, advance tax payments, and regular return filings are essential components of tax compliance. Advisors offering services across jurisdictions or internationally must be especially vigilant in determining applicable rules and seeking professional tax advice. As the sector continues to grow, staying updated with tax regulations and maintaining transparency will be key to sustainable success in the investment advisory industry in Pakistan.