The basics of tax law in Pakistan

Tax law in Pakistan forms the backbone of the country’s revenue system. These laws regulate the assessment, collection, and enforcement of taxes and are governed by statutes enacted by the Parliament. Taxation in Pakistan is primarily handled by the Federal Board of Revenue (FBR), with some taxes collected by provincial authorities. Understanding the structure and fundamentals of tax law is essential for individuals, businesses, and consultants operating in Pakistan.

Constitutional Framework of Taxation

The Constitution of Pakistan provides the foundation for taxation through:

• Article 77: No tax can be levied without the approval of the National Assembly.

• Fourth Schedule: It divides the authority between federal and provincial governments.

• Article 70 & 73: Define the legislative process for tax matters.

The federal government is authorized to impose taxes like income tax, sales tax on goods, customs, and excise duty. Provinces levy taxes such as sales tax on services, agricultural income tax, and property tax.

Types of Taxes in Pakistan

Pakistan’s tax system includes direct and indirect taxes:

Direct Taxes

1. Income Tax: Levied on income of individuals, AOPs (Association of Persons), and companies.

2. Capital Gains Tax (CGT): Applied on the gain from the sale of capital assets like securities and property.

3. Withholding Tax (WHT): A system where tax is deducted at source on various payments.

Indirect Taxes

1. Sales Tax: Imposed on the sale of goods and services.

2. Federal Excise Duty (FED): Charged on manufacturing of specific goods and provision of certain services.

3. Customs Duty: Levied on imports and exports.

Key Tax Laws in Pakistan

The primary legislations governing tax in Pakistan include:

• Income Tax Ordinance, 2001

• Sales Tax Act, 1990

• Federal Excise Act, 2005

• Customs Act, 1969

• Provincial Sales Tax Laws

• Tax Administration Reforms

Each of these statutes defines the scope, rates, exemptions, penalties, and procedures for assessment and appeal.

Income Tax in Pakistan

Scope and Applicability

The Income Tax Ordinance, 2001 applies to:

• Residents: Taxed on worldwide income.

• Non-residents: Taxed on Pakistan-source income.

Heads of Income

Income is categorized into five heads:

1. Salary

2. Income from Property

3. Income from Business

4. Capital Gains

5. Income from Other Sources

Tax Year

The tax year in Pakistan starts from 1st July to 30th June of the next calendar year.

Tax Rates

Rates are notified annually in the Finance Act. As of FY 2024–25:

• Individuals: Progressive rates from 2.5% to 35%

• Companies: 29% (general), reduced rates for certain sectors

• AOPs: Slab-based rates similar to individuals

Sales Tax in Pakistan

Overview

Sales Tax Act, 1990 governs sales tax on goods. It is administered by FBR for goods and by provincial authorities for services.

Rate of Sales Tax

• Standard rate: 18%

• Reduced or zero rates apply to specific goods or sectors like exports.

Registration and Filing

Businesses exceeding PKR 10 million turnover must register for sales tax. Monthly returns are to be filed via IRIS portal.

Federal Excise Duty (FED)

Applicability

FED is applicable on:

• Manufacturing of certain goods

• Import of excisable goods

• Provision of specific services like telecom, air travel

Rates and Filing

Rates vary between 5% and 20%. Returns are filed monthly along with payment.

Customs Duty

Governed by Customs Act, 1969

Duties are imposed on:

• Import of raw materials, finished goods, machinery

• Export of certain goods

Categories

• Regulatory Duty

• Additional Customs Duty

• Anti-dumping and Countervailing Duty

Customs are collected at ports and border entry points by Pakistan Customs.

Provincial Taxes

Following the 18th Amendment, provinces now levy taxes like:

• Sales Tax on Services

• Agricultural Income Tax

• Property Tax

• Motor Vehicle Tax

• Professional Tax

Each province has its own Revenue Authority (e.g., PRA, SRB, KPRA, BRA).

Withholding Tax Regime

Importance

Withholding tax is a major source of revenue. Tax is deducted at source on:

• Salaries

• Contracts

• Rent

• Dividends

• Utility bills

• Cash withdrawals

Key Sections

• Section 149 – Salary

• Section 153 – Services and supplies

• Section 155 – Rent

• Section 231A – Cash withdrawals

These are final or adjustable depending on the nature of transaction and taxpayer status.

Filing of Returns and Compliance

Who Must File

• Salaried individuals earning above PKR 600,000

• Business individuals/AOPs with turnover above PKR 1.2 million

• All companies

• NTN holders (in many cases)

Due Dates

• Individuals/AOPs: 30th September

• Companies: 31st December (with audited accounts)

• Sales Tax Returns: 15th of each month

Late filing results in penalties and default surcharge.

Tax Exemptions and Credits

Tax law provides exemptions and tax credits to promote investment, exports, and social development.

• Exemptions under Second Schedule of ITO, 2001

• Tax credits for:

  • Investment in shares and insurance

  • Donations to approved NGOs

  • Construction of new industrial undertakings

  • Employment generation

Audit and Assessments

Types of Audits

• Random audit

• Parametric audit

• Integrated audit (covering income, sales, and FED)

FBR issues notices under Section 177 or Section 122(5A) for audits or amendment of assessments.

Appeals and Dispute Resolution

Hierarchy

1. Commissioner Appeals

2. Appellate Tribunal

3. High Court

4. Supreme Court

Other dispute mechanisms include Alternative Dispute Resolution Committees (ADRCs) under Section 134A.

Penalties and Prosecutions

Failure to comply with tax obligations can result in:

• Monetary penalties

• Default surcharge

• Prosecution for tax fraud or evasion under Section 192–199 of the Income Tax Ordinance

Digitalization and Tax Reforms

FBR has introduced digital platforms like:

• IRIS for income tax and sales tax returns

• WeBOC for customs operations

• TAS (Tax Asaan App) for mobile access

Ongoing reforms aim to widen the tax base, reduce corruption, and improve ease of doing business.

Common Challenges

• Low Tax Base: Less than 3 million active filers in a population of over 240 million.

• Tax Evasion and Informality: Widespread cash transactions and unregistered businesses.

• Complex Procedures: Cumbersome documentation, frequent changes, and lack of awareness.

• Lack of Enforcement: Weak monitoring and limited capacity of field officers.

Future Outlook

To enhance tax collection, Pakistan is focusing on:

• Broadening the tax base

• Reducing reliance on indirect taxes

• Encouraging voluntary compliance

• Simplifying procedures

• Promoting digitization and e-governance

The Strategic Reform Plan 2025 of FBR is aimed at aligning tax practices with international standards.

Conclusion

Tax law in Pakistan is evolving, complex, and crucial for the country’s fiscal health. A clear understanding of basic laws, tax heads, compliance obligations, and digital platforms is essential for both individuals and businesses. Consulting a qualified tax advisor can help navigate the system efficiently and avoid penalties.