TAX STRUCTURE

Tax Structure

Income tax Pakistan

Law concerning taxation of income in Pakistan is
stated in the Income Tax Ordinance, 2001 (the
Ordinance) and the rules framed there under viz.
Income Tax Rules, 2002 (the Rules). The Ordinance
is a Central statute and is, therefore, applicable to
the whole of Pakistan .Under section 4 of the
Ordinance, income tax is imposed for each tax
year at specified rates on every person who has
taxable income for the year.
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Tax Year in Pakistan

Tax year is a period of twelve months ending on
30th June and shall be denoted by the calendar
year in which the said date falls.
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Taxable Income in Pakistan

It is the total income of a person for a tax year
reduced by the total of any deductible allowances,
under the Ordinance, for the year. A person is
entitled to a deductible allowance for the amount of
any Zakat paid by the person in a tax year under
the Zakat & Ushr Ordinance, 1980.
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Total Income
it is the sum of a person's income under each of the
heads of income for the year.
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Heads of Income in Pakistan

Under the Ordinance income is classified into the following
five heads:
Salary, Income from property, Income from business,
Capital gains and Income from other sources.
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Residence
An individual is considered resident for a tax year
if he/she is in Pakistan for more than 182 days in
that tax year.

Tax Filing status

Joint tax returns are not permitted; each
individual must file a separate tax return.
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Tax Deductions and tax allowances

Deductions and allowances are available for the
non salaried class, but not for the salaried class.

Real property tax

A 6% tax is imposed on the value of real
property
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Penalties
The penalty for failure to file a tax return is
0.1% of the amount of the tax payable for each
day of default. The minimum penalty is PKR 500
and the maximum is 25% of the amount of tax
payable.
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Payroll tax
Generally refers to two different kinds of similar taxes.
The first kind is a tax that employers are required to
withhold from employees' wages, also known as
withholding tax, pay-as-you-earn tax (PAYE), or pay-as-
you-go tax (PAYG). The second kind is a tax that is paid
from the employer's own funds and that is directly related
to employing a worker, which can consist of a fixed
charge or be proportionally linked to an employee's pay.
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Tax credits
are allowed under Chapter 3 Part 10 of the
Ordinance:
Charitable donations, investment in shares,
retirement annuity scheme and profit on debt.
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Tax rates
Tax rates for the salaried class in Pakistan are 0.5%
to 20%, and for other taxpayers, 0.5% to 25%.
Basis Income tax is payable by salaried male
individuals if taxable income exceeds PKR 200,000
and by female individuals if taxable income exceeds
PKR 260,000. Income tax is payable by non-salaried
individuals if taxable income exceeds PKR 100,000.
These thresholds are effective from 1 July 2009.
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CORPORATE TAX RATES

Pakistan corporate tax rate is 35% of net taxable income of

a company. For nonresidents, a 15% rate is levied on the
gross amount of royalties or technical service fees, and 30%
for other payments under the presumptive tax regime.
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Residence An entity is resident if it is

registered under the law of Pakistan or its
management and control is situated wholly in
Pakistan.
Basis Resident entities are taxed on
worldwide business income; nonresidents pay
tax only on Pakistan-source income.
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Taxable income
Business income is taxed under the following
"heads" of income:
business income, capital gains and other
income.
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Taxation of dividends
A resident entity pays tax at a rate of 10% on
dividend income regardless of whether the
dividends are Pakistan or foreign source. A
nonresident pays tax at a rate of 10% on Pakistan
source dividends.
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Taxation of Capital gains

Capital gains are one of the heads of income and
are taxed at the normal corporate rate. Gains
derived from the sale of capital assets held for
more than 1 year are reduced by 25% for tax
purposes and, therefore, 75% of the net gain is
taxable at a rate of 35%.
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PAKISTAN SALES TAX

The standard rate of Sales Tax in Pakistan is 17%.

Sales Tax
Taxable Filing and sales
Registration
transactions is mandatory for tax payment
Sales Tax is levied manufacturers if turnover Sales Tax returns and
on the supply of exceeds PKR 5 million; for payments must be
goods and retailers, if the value of made on a monthly
services, and the supplies exceeds PKR 5 basis.
import of goods. million; and for importers
and other persons if
required by another
federal or provincial law
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RGST
The RGST is actually plain old Value Added Tax
(VAT) with a new name. Since the VAT has already
had its fill of bad publicity, the government decided it
would be a smart move to rename and repackage
the new taxation system.
The RGST is a taxation system that operates by an
addition of 15 per cent tax on each and every value
addition on taxable products
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Who is involved?
The key players behind the proposed RGST are the

International Monetary Fund (IMF), the World Bank,

United States Mission to the European Union (USEU)
and other assorted donors who are tired of paying
their taxpayers money to cover up for the leaks in our
taxation system. But this is not to say that we do
not need reforms in our taxation system. The
International Monetary Organizations might be the
catalysts towards the reforms just now, but in all
reality, tax reforms have been long overdue
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Effect
Those who will be affected in one way or other are
the suppliers, the manufacturers and the retailers who
will all have to maintain and disclose proper sales
and production records and would thus find tax
evasion pretty difficult. Of course, the real victims are
the consumers who would bear the burden of higher
costs.
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How RGST work?
Unlike the old GST, the RGST will not be imposed just on the final
price of a product; rather, a certain amount of tax will be added at
each stage of production.
For example if a supplier sells raw material worth Rs100 to
a manufacturer, he would charge Rs115 instead of Rs100, and remit
the extra Rs15 as tax.
After manufacturing the product, the manufacturer, for example,
adds a profit of Rs2o. The product now costs Rs135, but instead of
selling it to the retailer at Rs135, the manufacturer will add
another 15 per cent to the value addition of Rs20 which will bring up
the cost to Rs138. The extra Rs3 will be remitted as tax.
Finally, the retailer will add his profit. Assuming that is another
Rs20, the price of the product is now up to Rs158 again. Instead of
selling it at Rs158, the retailer will add yet another 15 per cent of
the value addition and the final cost will be Rs161. The retailer will
then pay the added tax back to the treasury.
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