Understanding the different types of taxes in Pakistan

Taxation is a fundamental aspect of any country’s fiscal framework, enabling the government to fund public services, build infrastructure, and ensure economic stability. In Pakistan, taxation is administered by both federal and provincial authorities, and it covers a wide range of tax types that apply to individuals, businesses, and other entities. Understanding these tax types is essential for compliance and informed financial decision-making. This guide provides a detailed breakdown of the major types of taxes in Pakistan, their governing laws, responsible authorities, and compliance obligations.

1. Income Tax

Income Tax in Pakistan is governed by the Income Tax Ordinance, 2001, and is administered by the Federal Board of Revenue (FBR). It applies to individuals, Association of Persons (AOPs), and companies earning income from various sources.

1.1 Types of Income Covered

• Salary income

• Business income

• Rental income

• Capital gains

• Income from other sources (e.g., dividends, interest)

1.2 Progressive Tax Rates

Individuals and salaried persons are taxed at progressive rates. For example, as of Tax Year 2024-25:

• Salaried individuals with income up to PKR 600,000 are exempt

• Rates range from 2.5% to 35% depending on income slabs

1.3 Corporate Tax

Companies pay a flat corporate income tax. For tax year 2025:

• 29% for companies

• 15% for Small and Medium Enterprises (SMEs) under specific conditions

• 0.25% minimum tax on turnover (if no taxable income)

2. Sales Tax

Sales Tax is a value-added tax (VAT) levied on the sale and purchase of goods and certain services. The general rate is 17%.

2.1 Governing Law and Authorities

• Sales Tax Act, 1990 for goods under FBR jurisdiction

• Provincial Sales Tax Acts for services (Punjab, Sindh, KP, Balochistan)

2.2 Sales Tax on Services

Each province has its own Revenue Authority:

• PRA – Punjab Revenue Authority

• SRB – Sindh Revenue Board

• KPRA – Khyber Pakhtunkhwa Revenue Authority

• BRA – Balochistan Revenue Authority

• Services like telecom, hotels, restaurants, and consultancy are taxed under these authorities

2.3 Filing Requirements

• Monthly return filing

• Sales tax invoices

• STRN (Sales Tax Registration Number) is mandatory

3. Federal Excise Duty (FED)

FED is levied on manufacturing or import of specified goods and services. It is governed by the Federal Excise Act, 2005.

3.1 Common Items Subject to FED

• Cigarettes and tobacco

• Cement

• Sugar

• Aerated drinks

• Banking services

• Insurance services

3.2 Rates and Filing

Rates vary between 5% to 20% or may be fixed per unit. Returns are filed monthly via FBR’s IRIS portal.

4. Customs Duty

Customs Duty is imposed on goods imported into Pakistan and is governed by the Customs Act, 1969.

4.1 Categories of Duty

• Import Duty

• Regulatory Duty

• Additional Customs Duty

• Anti-dumping Duty (on specific goods)

4.2 Clearance and Valuation

Valuation is done by Customs officers based on international prices or agreed values. Goods are categorized under Harmonized System (HS) codes.

5. Capital Value Tax (CVT)

CVT is imposed on the transfer of immovable property and is governed by the Finance Act every year.

5.1 Applicability

CVT is levied on:

• Purchase of property

• Transfer of shares in unlisted companies

• Purchase of motor vehicles

5.2 Recent Developments

In the 2024 Finance Bill:

• CVT of 2% imposed on foreign assets of resident individuals

• 1% on acquisition of immovable property

6. Capital Gains Tax (CGT)

CGT is applied on the sale of capital assets such as shares and real estate.

6.1 CGT on Shares

• 15% on gains from sale of listed securities held for less than one year

• 0% on shares held for more than four years

6.2 CGT on Immovable Property

• 15% tax for holding period less than one year

• Rates reduce progressively to 0% after six years

7. Property Tax

This is a provincial levy on ownership of property, paid annually.

7.1 Administered by

• Local provincial excise and taxation departments

• Rates vary across cities and zones

• Rebates may be offered for timely payments

8. Withholding Taxes

Withholding tax is deducted at source on payments like salaries, contracts, dividends, and rent. It helps improve compliance and widen the tax base.

8.1 Common Withholding Scenarios

• Salaries – by employer

• Rent – by tenant

• Contracts – by the payer of services

• Utility bills – by utility providers

8.2 Filing and Deposits

Withheld taxes must be deposited with FBR and monthly withholding statements filed online.

9. Super Tax

Super tax is imposed on high-income persons and companies, introduced under the Income Tax Ordinance, Section 4B.

9.1 Super Tax Rates (2024-25)

• 1% to 10% on income exceeding PKR 150 million

• Applicable to banks, industrial and commercial enterprises

10. Professional Tax

This is a provincial tax levied on professionals such as lawyers, doctors, and engineers.

10.1 Collected By

• Provincial Excise and Taxation Departments

• Fixed annual amount (e.g., PKR 2,000–10,000)

11. Motor Vehicle Tax

Annual tax on registration and ownership of motor vehicles.

11.1 Rates

• Based on engine capacity

• Charged at the time of registration and annually

12. Hotel Tax

Levied on hotels and guesthouses, primarily by provincial authorities.

12.1 Applicability

• Room charges above specified thresholds

• Typically ranges between 5% to 16%

13. Dividend Tax

Tax on dividend income paid to shareholders of companies.

13.1 Current Rate

• 15% for filers

• 30% for non-filers

14. Advance Tax

Certain transactions are subject to advance income tax even before assessment.

14.1 Common Transactions

• Purchase/transfer of vehicles

• Property sale/purchase

• Cash withdrawal exceeding PKR 50,000/day

15. Tax on Foreign Income

Resident individuals are taxed on their global income, subject to double taxation treaties.

15.1 Foreign Tax Credit

Credit is available under Section 103 of the Income Tax Ordinance against foreign taxes paid.

Compliance Requirements Across Taxes

• Filing returns on time

• Deduction and deposit of withholding taxes

• Maintenance of tax records

• Reconciliation with bank accounts and suppliers

• E-filing through FBR and Provincial portals

Penalties for Non-Compliance

Non-compliance with tax obligations can lead to:

• Monetary fines

• Audit proceedings

• Freezing of bank accounts

• Blacklisting and suspension of licenses

• Imprisonment in extreme cases

Recent Tax Reforms in Pakistan

• Introduction of Track and Trace System

• Integration with NADRA and Banks

• Enhanced scrutiny on non-filers and benami assets

• Promotion of Point-of-Sale (POS) integration for retailers

• Tax harmonization among provinces and FBR

Conclusion

Pakistan’s taxation system is evolving rapidly to encourage documentation and expand the tax base. For individuals and businesses alike, understanding different types of taxes is essential for legal compliance and strategic financial planning. By keeping updated with tax laws and leveraging professional tax advisory services, taxpayers can ensure efficient tax management and avoid legal complications.