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Taxation of Private Limited Companies in Pakistan

Taxation of Private Limited Companies in Pakistan

Taxation of Private Limited Companies in Pakistan:

Private limited companies in Pakistan are required to comply with the taxation laws and regulations of the country. The income of the company is subject to income tax, which is levied by the Federal Board of Revenue (FBR). In this article, we will discuss the taxation of private limited companies in Pakistan in detail.

Definition of Private Limited Company:

A private limited company is a type of business structure where the liability of the shareholders is limited to the amount of their investment in the company. This means that the personal assets of the shareholders are not at risk if the company goes bankrupt or faces any legal issues. A private limited company is considered a separate legal entity from its owners, which means that it can own assets, enter into contracts, and sue or be sued in its own name.

Taxation of Private Limited Companies in Pakistan:

The income of private limited companies in Pakistan is subject to income tax. The tax rate varies depending on the taxable income of the company. The current tax rates for private limited companies in Pakistan are as follows:

For tax year 2021, the tax rate is 29% for companies whose taxable income is up to Rs. 75 million.

For tax year 2021, the tax rate is 30% for companies whose taxable income is above Rs. 75 million.

The taxable income of the company is calculated by subtracting the expenses and deductions from the total income of the company. The expenses that are allowed to be deducted include the cost of goods sold, salaries and wages, rent, repairs, and maintenance, among others. The deductions that are allowed include the depreciation of assets, donations made to charitable organizations, and contributions to employee retirement funds, among others.

Examples:

Let’s take an example to understand the taxation of private limited companies in Pakistan.

Suppose a private limited company has a total income of Rs. 100 million and expenses of Rs. 70 million. The taxable income of the company would be Rs. 30 million (100 million – 70 million). If the tax year is 2021, the tax rate for the company would be 29% since its taxable income is below Rs. 75 million. The tax liability of the company would be Rs. 8.7 million (30 million x 29%).

If another private limited company has a total income of Rs. 200 million and expenses of Rs. 130 million, the taxable income of the company would be Rs. 70 million (200 million – 130 million). Since the taxable income of the company is above Rs. 75 million, the tax rate for the company would be 30%. The tax liability of the company would be Rs. 21 million (70 million x 30%).

Advance Tax:

Private limited companies in Pakistan are also required to pay advance tax. Advance tax is a mechanism for collecting tax in installments throughout the year, instead of waiting for the end of the year to pay the entire tax liability. The advance tax is calculated based on the estimated taxable income of the company for the year. The advance tax is paid in four installments throughout the year, as follows:

First installment: 25% of the estimated tax liability is paid by 15th September.

Second installment: 50% of the estimated tax liability is paid by 15th December.

Third installment: 75% of the estimated tax liability is paid by 15th March.

Fourth installment: 100% of the estimated tax liability is paid by 15th June.

The advance tax paid by the company is adjusted against the final tax liability of the company for the year.

 

Conclusion:

In conclusion, private limited companies in Pakistan are subject to income tax on their taxable income. The tax rate varies depending on the taxable income of the company, and the tax liability is calculated based on the tax rate applicable for the tax year. Private limited companies are also required to pay advance tax in installments throughout the year, based on the estimated taxable income for the year. The advance tax paid by the company is adjusted against the final tax liability of the company for the year. It is important for private limited companies to comply with the taxation laws and regulations of the country to avoid penalties and legal issues. Companies can also consult tax experts or chartered accountants for advice on tax planning and compliance.