Month: June 2025

The provided text outlines comprehensive tax regulations, detailing various rates of advance tax and deductions at the source for diverse income types, such as dividends, profit on debt, and payments for goods and services. It extensively covers rules for income classification, taxable income computation, and allowable deductions like depreciation and amortization. The document also addresses international tax operations, offences and prosecutions for non-compliance, and the administrative framework for tax collection and enforcement. Furthermore, it specifies exemptions and reductions for certain entities and industries, alongside procedures for assessment, audit, and appeals.

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What is Income Tax

Based on the sources provided, income tax is a tax imposed for each tax year on every person who has taxable income for that year [11(1)]. It is governed by the Income Tax Ordinance, 2001.

Here’s a breakdown based on the sources:

• Imposition: Income tax is imposed subject to the Ordinance [11(1)]. Certain classes of income or persons may be subject to separate taxation or collection/deduction of tax as a final tax [13(4)].
• Computation: The income tax payable by a taxpayer is computed by applying the specified rates of tax (found in Division I or II of Part I of the First Schedule) to the taxpayer’s taxable income [12(2), 11(1)]. Any applicable tax credits allowed under the Ordinance are subtracted from this amount [12(2)]. Tax credits are applied in a specific order: foreign tax credit (section 103), then tax credits under Part X of Chapter III, and then credits under sections 147 and 168 [12(3)]. If income tax is to be deducted or collected at source or paid in advance, it must be done accordingly [14(6)].
• Taxable Income: The taxable income of a person for a tax year is defined as the total income (under clause (a) of section 10) for the year, reduced (but not below zero) by the total of any deductible allowances under Part IX of Chapter III.
• Total Income: The total income of a person for a tax year is the sum of the person’s income under all heads of income for the year. It also includes income exempt from tax under the Ordinance, for the purpose of determining total income.
• Heads of Income: All income, for the purpose of imposing tax and computing total income, is classified under the following heads:
• Salary [21(a), 23].
• Income from Property [21(b)].
• Income from Business [21(c), 29].
• Capital Gains [21(d)].
• Income from Other Sources [21(e), 41].
• Income Definition: The term “income” itself includes any amount chargeable to tax under the Ordinance and any amount subject to collection or deduction of tax under certain sections, such as 148, 150, 152(1), 153, 154, 156, 156A, 233, and sub-section (5) of 234 Division III of Chapter XII. It also includes imputable income as defined in clause (28A) of section 2 [15(iii), 16(iii), 8]. “Imputable income” relates to an amount subject to final tax and is the income that would have resulted in the same tax had the amount not been subject to final tax.
• Persons Subject to Tax: A “taxpayer” is any person who derives an amount chargeable to tax, and includes any representative, any person required to deduct or collect tax (under Part V of Chapter X and Chapter XII), or any person required to furnish a return of income or pay tax. The persons required to furnish a return of income include every company, and individuals/AOPs whose taxable income exceeds the maximum amount not chargeable to tax, or individuals whose business income exceeds a certain threshold.
• Rates of Tax: The First Schedule specifies various rates, including progressive rates for individuals and AOPs based on taxable income, and rates for companies. It also includes rates for minimum tax.
• Minimum Tax: Minimum tax is imposed on certain resident companies, permanent establishments of non-resident companies, and individuals/AOPs with turnover above a specified threshold. This tax is based on a percentage of the person’s turnover from all sources for the year, and is payable if it is higher than the actual tax computed under other provisions.
• Withholding Tax/Collection at Source: The Ordinance includes provisions for collection and deduction of tax at source under Part V of Chapter X and Chapter XII. This collected or deducted tax may be an adjustable advance tax or a final tax on the income. Tax collected or deducted has priority over other claims.

In essence, income tax under this Ordinance is a charge levied annually on the computed taxable income of persons, derived from various categorized sources, applying specific rates and taking into account credits and deductions. It operates through self-assessment (filing returns) subject to potential audits, advance payments, collection/deduction mechanisms, and defined procedures for collection, recovery, and refunds.

What are the Penalties if Income tax is not Paid on time?

Based on the provided sources, there are specific consequences and penalties for not paying income tax on time, primarily consisting of default surcharge and a distinct penalty for failure to deposit tax due. The sources also outline various recovery procedures.

Here’s a breakdown:

1. Due Date for Payment:

• Generally, the tax payable on taxable income for a tax year (including minimum tax) is due on the due date for furnishing the taxpayer’s return of income for that year [61(1)].
• Where tax is payable under an assessment order, amended assessment order, or any other order issued by the Commissioner, a notice specifying the amount is served, and the tax must be paid within thirty days from the date of service of the notice [61(2)].
• The Commissioner may grant an extension of time for payment or allow payment in instalments upon written application showing good cause [62(4)]. However, granting such extension or permission to pay by instalments does not preclude liability for default surcharge arising from the original due date [62(6)]. If a taxpayer defaults on an instalment, the whole balance becomes immediately payable [62(5)].

1. Default Surcharge:

• Any person who fails to pay any tax, penalty, or certain other amounts (referred to in sections 140 or 141) on or before the due date is liable for default surcharge [136(1)].
• Failure to pay advance tax as required under section 147 also results in liability for default surcharge [137(1A)]. If the tax paid under section 147 is less than ninety percent of the tax chargeable, default surcharge is imposed on the shortfall [138(1B)].
• A person who fails to collect or deduct tax as required, or fails to pay collected or deducted tax to the Commissioner by the due date, is also liable for default surcharge on the unpaid amount [139(3)].
• The rate of default surcharge is twelve percent or KIBOR plus three percent per annum, whichever is higher, computed for the period commencing on the date the amount was due and ending on the date on which it was paid [136(1), 137(1A), 139(3)].

1. Penalty for Failure to Deposit Tax Due:

• Under Section 182, there is a specific penalty for “Any person who fails to deposit the amount of tax due or any part thereof in the time or manner laid down under this Ordinance or rules made thereunder”.
• For the first default, the penalty is five per cent of the amount of the tax in default.
• For the second default, an additional penalty of 25% of the amount of tax in default is imposed.
• For the third and subsequent defaults, an additional penalty of 50% of the amount of tax in default is imposed.
• There is a provision for a 50% reduction in this penalty if the person opts to pay the tax due based on a Commissioner (Appeals) order on or before the due date given in the notice under section 137 and does not file a further appeal under section 131.

1. Recovery of Unpaid Tax:

• For the purpose of recovering any tax due, the Commissioner may serve a notice requiring payment [63(1)].
• If the amount is not paid within the specified time, the Commissioner can proceed to recover it out of the taxpayer’s property or through the arrest of the taxpayer [63(1)].
• The Commissioner can also require persons owing money to the taxpayer or holding money on their behalf to pay that money directly to the Commissioner. However, the Commissioner cannot issue such a notice for recovery if the taxpayer has filed an appeal under section 127 regarding the order under which the tax is payable and the appeal is not decided, provided ten percent of the tax due has been paid by the taxpayer.
• Specific procedures exist for recovery from private companies and associations of persons, estates in bankruptcy, non-resident members of associations, non-resident ship or aircraft owners/charterers, and persons assessed in Azad Jammu and Kashmir.
• Recovery proceedings can also be initiated to recover liabilities outstanding under other laws if they are treated as income tax arrears.

It’s important to note that failing to file a tax return by the due date is a separate offence with its own penalties, although late filing can also impact a person’s status on the active taxpayers’ list and may require paying a surcharge for inclusion. The penalties specifically linked to not paying the tax itself when due are the default surcharge and the penalty under Section 182, Entry 5 [136(1), 101, 102]. The old Section 183, which also dealt with penalties for non-payment, has been omitted.

What happens if we do not file income tax return on time?

Based on the sources provided, failing to file an income tax return on time can result in several penalties and consequences:

1. Monetary Penalties:

• Any person who fails to furnish a return of income as required under section 114 within the due date is liable for a penalty.
• The penalty is equal to the higher of:
• 0.1% of the tax payable in respect of that tax year for each day of default.
• Rupees one thousand for each day of default.
• There are minimum penalty amounts:
• Rupees ten thousand in case of an individual having seventy-five percent or more income from salary.
• Rupees fifty thousand in all other cases.
• The maximum penalty shall not exceed two hundred percent of tax payable by the person in a tax year.
• However, the amount of penalty is reduced if the return is filed within a certain period after the due date or extended due date:
• Reduced by 75% if filed within one month.
• Reduced by 50% if filed within two months.
• Reduced by 25% if filed within three months.
• “Tax payable” for this penalty refers to the tax chargeable on taxable income based on assessments made or treated as made under sections 120, 121, 122, or 122D.
• Separate penalties exist for failure to furnish a wealth statement (Section 182, Entry 1AA), a foreign assets and income statement (Section 182, Entry 1AAA), or a return required by a specific notice under section 117(3) (Section 182, Entry 1B).

1. Exclusion from Active Taxpayers’ List (ATL) and Related Consequences:

• Notwithstanding other provisions, if a person fails to file a return of income under section 114 by the due date (or extended date), such person shall not be included in the active taxpayers’ list for the year for which the return was not filed on time.
• Being excluded from the ATL has further consequences:
• The person shall not be allowed, for that tax year, to carry forward any loss under Part VIII of Chapter IV.
• The person shall not be issued refund during the period they are not included in the active taxpayers’ list.
• A person can be included in the active taxpayers’ list after filing a late return if they pay a surcharge. The surcharge amounts are:
• Rupees twenty thousand in case of a company.
• Rupees ten thousand in case of an association of persons.
• Rupees one thousand in case of an individual.

1. Commissioner’s Power to Require a Return and Make Assessment:

• If, in the Commissioner’s opinion, a person was required to file a return under section 114 but failed to do so, the Commissioner may, by notice, require that person to furnish a return within thirty days (or longer/shorter). This notice can be issued for the last five completed tax years, or the last ten if the person hasn’t filed for the last five.
• If a person fails to furnish a return of income for a tax year when required by a notice (e.g., under section 114(4)), the Commissioner may, based on available information and best judgment, make an assessment of the person’s taxable income and the tax due thereon. This assessment order will state the taxable income, tax due, tax paid, and appeal process. Such an order can generally be issued within six years after the end of the relevant tax year.

1. Provisional Assessment for Non-Filers with Withholding Tax:

• Where a person’s tax has been collected or deducted at a potentially higher rate (as per Rule 1 of the Tenth Schedule for persons not on ATL or late filers) and the person fails to file a return by the due date or extended date, the Commissioner shall make a provisional assessment of the taxable income and tax due within sixty days of the due date.
• In this provisional assessment, the Commissioner shall impute taxable income based on the amount of tax deducted or collected, treating the imputed income as concealed income for the purposes of Section 111.
• This provisional assessment becomes a final assessment order after forty-five days from its service unless the person files their return and wealth statement within that period.
• If the provisional assessment becomes final, the Commissioner may initiate proceedings for the imposition of penalties under section 182 on account of non-furnishing and concealment of income.

1. Prosecution:

• Any person who, without reasonable excuse, fails to comply with a notice to furnish a return under section 114(3) or (4) commits an offence. This offence is punishable on conviction with a fine or imprisonment for up to one year, or both.
• If convicted for this offence and the person still fails to furnish the return within the court-specified period, they commit a further offence punishable with a fine (up to fifty thousand rupees) or imprisonment for up to two years, or both.

1. Other Measures for Non-ATL Persons:

• The Board has powers to issue general orders regarding persons not on the active taxpayers’ list but liable to file. Such orders may entail consequences such as:
• Disabling of mobile phones or mobile phone SIMs.
• Discontinuance of electricity connection.
• Discontinuance of gas connection.
• Restriction on foreign travel for citizens of Pakistan (with some exceptions).

In summary, failing to file your income tax return on time can lead to significant monetary penalties, exclusion from the active taxpayers’ list (which prevents loss carry-forward and refunds unless a surcharge is paid), potential best-judgment assessment or provisional assessment with imputed income, and even prosecution.

What is WHT With Holding Tax and is it adjustable in filing of return?

Based on the sources, “Withholding Tax” (WHT) is a common term for amounts of tax that are collected or deducted at source by one person from a payment made to another person. This mechanism involves the payer or a designated collection agent deducting the tax at the time of payment or collection and forwarding it to the tax authorities.

The sources refer to this process using terms such as:

• “advance tax and deduction of tax at source”
• “advance tax paid to a collection agent” (under Division II of Part V of Chapter X)
• “deduction of tax at source” (under Division III of Part V of Chapter X)
• Specific “advance tax” provisions under Chapter XII.

Common examples of payments or transactions subject to this collection/deduction mentioned in the sources include:

• Imports of goods
• Dividends paid
• Profit on debt
• Payments for goods, services, or contracts
• Cash withdrawals from banks
• Electricity connections (over a certain threshold)
• Sale or transfer of immovable property
• Purchase of immovable property
• Banking transactions other than through cash for persons not on the active taxpayers’ list
• Bonus shares issued by companies

Is Withholding Tax Adjustable in Filing of Return?

Generally, yes, tax collected or deducted at source is adjustable in the filing of the income tax return.

Here’s how the sources describe this:

1. General Rule of Adjustment: Any amount of tax collected under Division II of Part V (like imports) or deducted under Division III of Part V (like dividends, profit on debt, payments for goods/services) or Chapter XII is treated as tax paid by the person from whom it was collected or deducted. This person is then allowed a tax credit for that amount when computing the tax due on their taxable income for the tax year in which the tax was collected or deducted. Advance tax paid under Section 147 and advance tax paid by provincial sales tax registered persons under Section 147A are also taken into account while working out advance tax payable under Section 147.
2. When WHT is a “Final Tax”: However, there are specific instances where tax collected or deducted is considered a “final tax” on the income from which it was collected or deducted. When an amount is subject to final tax:

• That income amount is not chargeable to tax under any other head of income in computing the person’s taxable income.
• No deductions are allowed for expenditures incurred in deriving that income.
• The amount is not reduced by any deductible allowance or set-off of any loss.
• Tax credits allowed under the Ordinance generally do not reduce the final tax payable.
• This means that tax treated as a final tax is not adjustable against the overall tax liability calculated on other sources of taxable income.
• Sections specifically mentioned where the tax can be final include Section 148(7), Section 152(1E), Section 154A(2), Section 156(3), Section 156A(2), and Section 236Z(7). Tax under Section 7E (tax on deemed income) is also final. Tax collected on certain imported goods under Section 148(7A) is minimum tax on that income, which functions like final tax. Tax on gains from constructed property with a holding period exceeding four years is zero, and specific rules apply for shorter periods.

1. Exception for Non-Filer Higher Rates: Even when the tax is a final tax, if separate rates are prescribed for filers and non-filers and a higher rate is collected/deducted from a non-filer, the excess tax collected or deducted on account of the higher non-filer rate shall be adjustable in the return filed for the relevant tax year.
2. Specific Cases of Adjustable Tax: Several specific provisions in Chapter XII explicitly state the tax collected is adjustable, such as:

• Advance adjustable tax on cash withdrawals under Section 231AB.
• Adjustable tax collected on monthly electricity bills exceeding a certain amount.
• Advance tax collected on the sale or transfer of immovable property under Section 236C (except tax liability under Section 7E which must be discharged).
• Advance tax collected on the purchase of immovable property under Section 236K (with an exception for certain non-resident buyers where it is final).
• Advance adjustable tax on banking transactions (non-cash) for non-ATL persons under Section 236P.

1. Specific Case Where WHT is Not Adjustable: Traders qualifying under certain rules in the Ninth Schedule (Special Procedure for Small Traders and Shopkeepers) are not entitled to claim any adjustment of withholding tax collected or deducted under the Ordinance against the tax payable on their trading activity profits and gains. They are also not entitled to adjust any refund due.
2. Provisional Assessment for Non-Filers (Tenth Schedule): For persons whose tax is collected or deducted at a potentially higher rate for not being on the active taxpayers’ list (as per the Tenth Schedule Rule 1), if they fail to file a return, the Commissioner can make a provisional assessment. However, if the person files their return within a specified period (45 days from provisional assessment service), the tax deducted or collected shall be adjustable against the tax payable in the return filed. If they don’t file and the provisional assessment becomes final, the tax collected/deducted based on imputed income may be treated as final tax, and penalties may be imposed.

In summary, WHT is tax collected/deducted at source. It is generally adjustable against your final tax liability by claiming a tax credit, unless the specific provision under which it is collected or deducted designates it as a final tax on that income source. Even in final tax cases, the excess tax paid due to higher rates for non-filers is typically adjustable.

Pakistan Property Tax Guide 2024

The sources provide detailed information on various aspects of property tax in Pakistan, primarily under the Income Tax Ordinance, 2001, which was amended up to June 30, 2024.

Here are the key details regarding property tax:

1. Classification of Income from Property

• “Income from Property” is one of the five heads under which income is classified for the imposition of tax and the computation of total income. The other heads are Salary, Income from Business, Capital Gains, and Income from Other Sources.
• The income of a person under this head for a tax year is the total amounts derived that are chargeable to tax, reduced by any allowed deductions.
• If total deductions exceed chargeable amounts, the person is treated as sustaining a loss under that head.
• For resident persons, both Pakistan-source and foreign-source income are considered. For non-resident persons, only Pakistan-source income is considered.

2. Computation of Income from Property (Section 15 & 15A)

• Specific deductions are allowed when computing income chargeable under the head “Income from Property” [2, 15A]. These include:
• The amount of profit or interest paid on a mortgage or other capital charge if the property is subject to it.
• Any expenditure, not exceeding 4% of the rent chargeable to tax, paid or payable for the purpose of deriving rent, including administration and collection charges.

3. Non-Adjustable Amounts Received (Section 16)

• If an owner receives an amount from a tenant that is not adjustable against rent, this amount is treated as rent chargeable to tax.
• It is allocated equally over the tax year in which it was received and the subsequent nine tax years.
• If the tenancy terminates before ten years and the amount is refunded, no portion is allocated to the refund year or subsequent years.
• However, if the property is re-let to a “succeeding tenant” who also pays a non-adjustable amount, that “succeeding amount” (reduced by any portion of the “earlier amount” already charged to tax) will be treated as rent as specified above.

4. Tax Rates on Income from Property (Division VIA, First Schedule)

• For individuals and associations of persons, the tax rates on gross rent are as follows:
• Where gross rent does not exceed Rs. 200,000: Nil.
• Where gross rent exceeds Rs. 200,000 but does not exceed Rs. 600,000: 5% of the gross amount exceeding Rs. 200,000.
• Where gross rent exceeds Rs. 600,000 but does not exceed Rs. 1,000,000: Rs. 20,000 plus 10% of the gross amount exceeding Rs. 600,000.

5. Withholding Tax on Rent of Immovable Property (Section 155)

• Every prescribed person making a payment (in full or part, including advance) for rent of immovable property (which also includes rent for furniture, fixtures, and services related to the property) must deduct tax from the gross amount of rent paid.
• The “gross amount of rent” includes any non-adjustable amounts referred to in Section 16(1) or (3).
• This withholding tax applies regardless of the head of income under which the rent might be classified.

6. Capital Gains on Immovable Property (Section 37)

• Any gain arising from the disposal of immovable property situated in Pakistan is chargeable to tax under the head “Capital Gains”.
• The rates are specified in Division VIII of Part I of the First Schedule.
• Rates for properties acquired on or before June 30, 2024:
• Holding period ≤ 1 year:
• Open Plots: 15%
• Constructed Property: 15%
• Flats: 15%
• Holding period > 1 year but ≤ 2 years:
• Open Plots: 12.5%
• Constructed Property: 10%
• Flats: 7.5%
• Holding period > 2 years but ≤ 3 years:
• Open Plots: 10%
• Constructed Property: 7.5%
• Flats: 0%
• Holding period > 3 years but ≤ 4 years:
• Open Plots: 7.5%
• Constructed Property: 5%
• Flats: 0%
• Holding period > 4 years: 0% for all
• Rates for properties acquired on or after July 1, 2024:
• Holding period ≤ 1 year: 15% for persons appearing on the Active Taxpayers’ List on the date of disposal. For individuals and associations of persons, the rates specified in Division I apply, and for companies, Division II applies.

7. Tax on Deemed Income (Section 7E)

• For tax year 2022 and onwards, a tax is imposed on “deemed income” at rates specified in Division VIIIC of Part-I of the First Schedule. The sources indicate this often relates to immovable property, as property transfer registration requires discharge of this tax.

8. Tax on Builders and Developers (Section 7F)

• A tax is imposed on the profits and gains of persons deriving income from the business of construction and sale of residential/commercial/other buildings, or development and sale of residential/commercial/other plots, or both activities.
• This tax is charged at the rates specified in Division I or II of Part-I of the First Schedule on the taxable profit.

9. Advance Tax on Sale or Transfer of Immovable Property (Section 236C)

• Any person responsible for registering, recording, or attesting the transfer of immovable property must collect advance tax from the seller or transferor. This includes local authorities, housing societies, etc..
• The tax collected is generally adjustable.
• Exception: If the immovable property is acquired and disposed of within the same tax year, the tax collected under this section becomes minimum tax.
• Exemptions: This section does not apply to a seller who is a dependent of a Shaheed, war-wounded person, disabled person, or a deceased employee of the armed forces, federal, or provincial government, or to transfers to legal heirs of such persons.
• Final Tax Discharge: If the seller/transferor is a non-resident individual holding a Pakistan Origin Card (POC), National ID Card for Overseas Pakistanis (NICOP), or Computerized National ID Card (CNIC) who acquired the property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA), the tax collected under this section is a final discharge of tax liability for capital gains.
• Requirement for Section 7E compliance: Registration/recording/attestation of property transfer will not occur unless the seller/transferor has discharged their tax liability under Section 7E and provided evidence.
• Rates for Non-Active Taxpayers (Rule 1 of Tenth Schedule): For sellers/transferors not appearing on the active taxpayers’ list, the tax rate for Section 236C is increased:
• Gross amount of consideration received does not exceed Rs. 50 million: 6%.
• Gross amount of consideration received exceeds Rs. 50 million but does not exceed Rs. 100 million: 7%.
• Gross amount of consideration received exceeds Rs. 100 million: 8%.

10. Advance Tax on Purchase or Transfer of Immovable Property (Section 236K)

• Any person responsible for registering, recording, or attesting the transfer of immovable property must collect advance tax from the purchaser or transferee.
• This advance tax is adjustable.
• Final Tax Discharge: If the buyer/transferee is a non-resident individual holding a POC, NICOP, or CNIC who acquired the property through an FCVA or NRVA, the tax collected under this section is a final discharge of tax liability for such buyer/transferee.
• Installment Payments: If payments for purchase or allotment of immovable property are collected in installments, advance tax must be collected from the allottee/transferee with each installment. If the accumulated tax collected through installments equals the total tax payable, no further tax is collected at the time of property transfer.
• Rates (Division XVIII, Part IV of First Schedule – as per Finance Act 2024):
• Where value of immovable property is up to Rs. 4 million: 0%.
• Where the value of immovable property is more than Rs. 4 million:
• Filer: 2%.
• Non-Filer: 4% (previously 1% until a date notified by the Board).
• Rates for Non-Active Taxpayers (Rule 1 of Tenth Schedule): For purchasers/transferees not appearing on the active taxpayers’ list, the tax rate for Section 236K is increased:
• Fair Market Value of Immovable Property does not exceed Rs. 50 million: 12%.
• Fair Market Value of Immovable Property exceeds Rs. 50 million but does not exceed Rs. 100 million: 14%.
• Fair Market Value of Immovable Property exceeds Rs. 100 million: 16%.

11. Wealth Statement and Registration Requirements

• The Commissioner may require any individual to furnish a wealth statement detailing their total assets and liabilities (including foreign assets and liabilities) as well as those of their spouse, minor children, and other dependents. This statement must also include assets transferred and consideration for transfer, and details of expenditures. A reconciliation statement of wealth is also required.
• Every resident individual taxpayer filing a return of income must furnish a wealth statement and wealth reconciliation statement.
• Even if a person is not obliged to furnish a return (because all income is subject to final taxation, e.g., under sections 5, 6, 7, 148, 151, 152, 153(3), 154, 156, 156A, 233(3), 234A), they must still furnish a statement to the Commissioner showing particulars of their income.
• Persons with a taxable income of Rs. 500,000 or more, or those under the final tax regime who paid Rs. 20,000 or more tax, must file a wealth statement along with its reconciliation.
• Any person (other than a company) who owns immovable property with a land area of 500 square yards or more or owns any flat located in municipal limits, cantonment, Islamabad Capital Territory, or a rating area, is required to furnish a return of income.

12. Directorate-General of Immovable Property (Section 230F)

• This directorate is established to perform functions assigned by the Board, including the determination of fair market value of immovable property and identifying instances where the consideration for property transfer has been understated to avoid or reduce withholding tax, conceal unexplained amounts (under Section 111), or avoid/reduce capital gains tax.
• The Directorate-General can appoint valuers or experts for property valuation.

13. Exemptions Related to Immovable Property

• Profits and gains accruing to a person on the sale of immovable property or shares of a Special Purpose Vehicle to any type of REIT scheme were exempt from tax up to June 30, 2023.

14. Joint Ownership of Property (Section 66)

• If immovable property is owned by two or more persons and their respective shares are definite and ascertainable, they are not assessed as an association of persons in respect of that property. Instead, each person’s share in the income from the property is taken into account in computing their individual taxable income.

Pakistan Import Tax Explained

Property tax in the context of imports primarily refers to the advance tax collected by the Collector of Customs on imported goods under Section 148 of the Income Tax Ordinance, 2001. This is a crucial aspect of the tax regime for businesses and individuals engaged in import activities.

Here are the detailed provisions regarding taxation on imports:

1. Nature and Collection of Tax on Imports

• Advance Tax Collection: The Collector of Customs is responsible for collecting advance tax from every importer of goods. This tax is collected at the time customs duty would be payable, or if the goods are exempt from customs duty, at the time customs duty would have been payable had the goods been dutiable.
• Applicability: This advance tax applies to goods classified in Parts I to III of the Twelfth Schedule. The Board has the authority to add, omit, or amend entries in the Twelfth Schedule and to specify conditions for treating goods as raw material under Part II even if classified under Part III.
• Legal Framework: The provisions of the Customs Act, 1969, apply to the collection of tax under this section, where relevant. The Board can also determine the minimum value of goods for the purpose of collection.
• Treatment of Income: Any amount subject to collection of tax under Division II of Part V of Chapter X (which includes Section 148) is considered “income” for tax purposes. Generally, where income tax is to be collected in advance, it shall be so collected.

2. Status of Tax Collected (Adjustable vs. Minimum Tax)

The tax collected under Section 148 is generally minimum tax on the income of the importer arising from the imports. This means that the collected tax is considered the final tax liability for the income generated from those specific imports.

However, there are important exceptions:

• Adjustable Tax for Industrial Undertakings: The tax collected under Section 148 is not minimum tax (implying it is adjustable) when the import is of goods by an industrial undertaking for its own use.
• Minimum Tax for Specific Goods: Regardless of the general rule, the tax collected under Section 148 shall be minimum tax on the income of every person arising from imports of:
• Edible oil.
• Packaging material.
• Paper and paper board.
• Plastics.

3. Calculation of “Value of Goods” for Tax

The “value of goods” for the purpose of collecting advance tax under Section 148 is determined as follows:

• Goods Chargeable at Retail Price: For goods chargeable to tax at retail price under the Third Schedule of the Sales Tax Act, 1990, the value is the retail price of such goods increased by sales tax payable in respect of the import and taxable supply of the goods.
• Other Goods: For goods other than those specified above or those with a minimum value notified by the Board, the value is determined under the Customs Act, 1969, as if the goods were subject to ad valorem duty, increased by the customs-duty, federal excise duty, and sales tax, if any, payable on the import of the goods.
• Minimum Value as Notified by Board: The Board may also notify a “minimum value” which, if applicable, is used to calculate the tax, increased by the customs-duty, federal excise duty, and sales tax payable.

4. Tax Rates on Imports

The rates of advance tax to be collected by the Collector of Customs under Section 148 are specified in Part II of the First Schedule. These rates vary depending on the type of goods and the importer.

Some examples of rates include:

• 1% of import value (increased by customs-duty, sales tax, federal excise duty) for:
• Industrial undertakings importing remeltable steel (PCT Heading 72.04) and directly reduced iron for their own use.
• Persons importing potassic fertilizers or urea.
• Manufacturers importing items covered under S.R.O. 1125(I)/2011.
• Persons importing Gold, Cotton, or LNG.
• Goods classified in Part I of the Twelfth Schedule.
• 2% of import value (increased by customs-duty, sales tax, federal excise duty) for:
• Goods classified in Part II of the Twelfth Schedule.
• Persons importing pulses.
• 3% of import value for commercial importers covered under S.R.O. 1125(I)/2011.
• 4% of import value for persons importing coal.
• 4.5% of import value for ship breakers on import of ships.
• 5.5% of import value for industrial undertakings not covered under S.Nos. 1 to 4 and companies not covered under S.Nos. 1 to 5.
• 6% of import value for persons not covered under S.Nos. 1 to 6.
• Special Rates for Plastic Raw Material:
• Industrial undertakings importing plastic raw material (PCT Heading 39.01 to 39.12) for their own use: 1.75%.
• Commercial importers importing plastic raw material (PCT Heading 39.01 to 39.12): 4.5%.
• Specific Rates for Mobile Phones: A table specifies tax rates based on the C&F value of the mobile phone in US Dollars (e.g., Rs. 70 for up to $30, Rs. 100 for exceeding $30 and up to $100).

5. Exemptions and Tax Concessions

The Second Schedule of the Income Tax Ordinance specifies various exemptions and tax concessions that may apply to imports.

Exemptions from collection under Section 148 include:

• Goods specified under Heading 9929, Sub-Chapter VIII of Chapter 99 of the First Schedule to the Customs Act, 1969 [126(v)].
• Liquefied Petroleum Gas (LPG) [126(vi)].
• Liquefied Natural Gas (LNG) [126(vii)].
• Note: While LNG is listed as exempt from collection here, it is also listed with a 1% rate in another part of the source [99, 126(vii)]. You may want to verify the current applicability of this specific exemption.
• Agricultural tractors imported in CBU condition [126(viii)].
• An indirect exporter as defined in the Duty and Tax Remission for Export Rules, 2001 [126(ix)].
• Radio Navigational Aid Apparatus imported for an airport on or after January 1, 2006 [126(x)].
• Import of specific food items including onions, potatoes, tomatoes, garlic, halal meat (goat, sheep, beef), and live animals (bovine, buffalos, cows, sheep, goats, camels) [127(xii)].
• Goods donated for the relief of earthquake victims or flood victims of 2007, provided they are exempt from customs duties and sales tax [127(xiv), 130(xxvi)].
• Tents, tarpaulin, and blankets [127(xv)].
• Import of ships and floating crafts including tugs, dredgers, and survey vessels [127(xvii)].
• One-time import of 32 buses by Daewoo Express Bus Service Ltd [128(xix)].
• Goods temporarily imported into Pakistan for subsequent exportation that are exempt from customs duty and sales tax [128(xx)].
• Capital goods imported by a manufacturer whose sales are 100% exports, provided they have a certificate from the Commissioner of Income Tax stating the goods will be installed in their own industrial undertaking and exclusively used for export production [128(xxi)].
• Capital goods and raw material imported by a manufacturer exporter registered with the Sales Tax Department [129(xxii)].
• Petroleum (E&P) companies covered under SRO. 678(I)/2004, with the exception of motor vehicles imported by such companies [129(xxiii), 132(xii)].
• Companies importing high speed diesel oil, light diesel oil, high octane blending component or motor spirit, furnace oil, JP-1, MTBE, kerosene oil, crude oil for refining, and chemicals for refining, in respect of such goods [129(xxiv), 132(xi)].
• Re-importation of re-usable containers for re-export that qualify for customs-duty and sales tax exemption on temporary import [130(xxv)].
• Plant, machinery, equipment, and specific items used in the production of bio-diesel that are exempt from customs-duty and sales tax [130(xxvii)].
• The Federal Government, a Provincial Government, or a Local Government [131(vi), (vii), (viii)].
• Mineral oil imported by a manufacturer or formulator of pesticides, if exempt from customs-duties [131(v)].
• Goods produced or manufactured and exported from Pakistan that are subsequently imported within one year of their exportation, provided conditions of Section 22 of the Customs Act, 1969, are complied with [132(xiii)].

Tax concessions (reduced rates) for imports include:

• White Sugar: For specific periods, tax under Section 148 was collected at 0.25% for import of white sugar, commercial import of white sugar, and import of raw sugar by sugar mills (subject to quota).
• Border Sustenance Markets: For goods supplied within the limits of Border Sustenance Markets established with Iran and Afghanistan, there is an exemption. However, if these goods are brought outside the market limits, income tax is charged on the import value as per Section 148 provisions. Customs authorities may require a bank guarantee equal to the income tax involved, which is released upon presentation of a consumption certificate [125(iii)].

6. Relation to Other Tax Provisions

• Exemption from Withholding Tax on Resale: If an importer has paid tax under Section 148 in respect of goods and subsequently sells those goods in the same condition as they were when imported, that sale is exempt from tax deduction under Section 153(1) (payments for goods or services). This prevents double taxation on the same transaction.
• Motor Vehicle Sales: While not a direct import tax, Section 231B mandates advance tax collection at the time of sale of motor vehicles by the manufacturer. If the vehicle is imported, and tax under Section 148 was already collected from the same person for that vehicle, Section 231B does not apply [78(4)]. The value for these vehicles can be the import value assessed by Customs authorities plus duties and taxes.
• Certificate of Collection: Every person collecting tax under Division II of Part V (which includes Section 148) must furnish a certificate of collection or deduction of tax to the person from whom the tax has been collected.

Taxation of Exports: Advance, Minimum, and Final Regimes

Taxation on exports involves the collection or deduction of advance tax at various stages of the export process, primarily from foreign exchange proceeds or the value of exported goods. The nature of this tax (whether adjustable, minimum, or final) and the applicable rates can vary depending on the type of export and the exporter.

Here are the details regarding taxation on exports, based on the provided sources:

1. Advance Tax on Export Proceeds (Section 154)

• Collection by Authorized Dealers: Every authorized dealer in foreign exchange is required to deduct tax from the foreign exchange proceeds on account of the export of goods by an exporter, at the time of realization of these proceeds [68(1)]. This deduction also includes advance tax [68(1)].
• Collection by Banking Companies: Every banking company must deduct tax from the proceeds on account of a sale of goods to an exporter under an inland back-to-back letter of credit or any other arrangement prescribed by the Board, at the time of realization of these proceeds [70(3)].
• Collection by Export Processing Zone Authority: The Export Processing Zone Authority collects tax at the time of export of goods by an industrial undertaking located in a Zone [70(3A)].
• Deduction by Direct Exporters/Export Houses: Direct exporters and export houses registered under the Duty and Tax Remission for Exports Rules, 2001, and Export Facilitation Scheme, 2021, must deduct tax when making a payment for a firm contract to an indirect exporter as defined under those rules [71(3B)].
• Collection by Collector of Customs: The Collector of Customs collects tax from the gross value of goods exported at the time of clearing the goods [71(3C)].
• Tax Rates: The tax rates for these collections/deductions are specified in Division IV of Part III of the First Schedule [68(1), 70(3), 70(3A), 71(3B), 71(3C)]. Specifically, the rate of tax to be deducted under sub-sections (1), (3), (3A), or (3B) of section 154 is 1% of the proceeds of the export.
• Nature of Tax: The tax deductible under Section 154 (excluding sub-section (1), which is adjustable) on the income of a resident person is minimum tax [67(3), 72]. However, the tax deductible under sub-section (1) of section 154 is adjustable [69(2)].

2. Advance Tax on Export of Services (Section 154A)

• Collection by Authorized Dealers: Every authorized dealer in foreign exchange must deduct tax from the realization of foreign exchange proceeds on account of various services, including:
• Computer software, IT services, or IT Enabled services [72(1)].
• Construction contracts executed outside Pakistan [73(1)(d)].
• Foreign commission due to an indenting commission agent [73(1)(da)].
• Other services rendered outside Pakistan as notified by the Board [73(1)(e)].
• Tax Rates: The rates for these deductions are specified in Division IVA of Part III of the First Schedule [72(1)].
• For export proceeds of Computer software or IT services or IT Enabled services, the rate is 0.25% of proceeds for tax years 2023.
• Nature of Tax (Final Tax Regime): The tax deductible under Section 154A is generally a final tax on the income arising from these transactions, provided certain conditions are met [73(2)]. These conditions include:
• Return has been filed [73(2)(a)].
• Withholding tax statements for the relevant tax year have been filed [73(2)(b)].
• No credit for foreign taxes paid shall be allowed [74(2)(d)].
• Option to Opt Out: The final tax provisions of sub-section (2) of Section 154A will not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation [74(3)].

3. Exemptions and Concessions Related to Exports

• Indirect Exporter (Section 148 exemption): The provisions of Section 148 (advance tax on imports) shall not apply to an indirect exporter as defined in the Duty and Tax Remission for Export Rules, 2001 [125(ix)].
• Capital Goods and Raw Material for Export Production: Section 148 (advance tax on imports) shall not apply to the import of capital goods by a manufacturer whose sales are 100% exports, provided they have a certificate from the Commissioner stating the goods will be installed in their own industrial undertaking and exclusively used for production of goods to be exported [127(xxi)].
• Capital Goods and Raw Material by Manufacturer Exporter: Section 148 also does not apply to capital goods and raw material imported by a manufacturer exporter registered with the Sales Tax Department [127(xxii)]. This is consistent with a previous clause that also exempted capital goods and raw material imported exclusively for own use by a manufacturer registered with Sales Tax Department from Section 148.
• Exemption from Section 153(1) for Imported Goods Sold: A sale of goods is exempt from tax deduction under Section 153(1) (payments for goods or services) if:
• The sale is made by the importer of the goods [66(a)(i)].
• The importer has paid tax under Section 148 in respect of the goods [66(a)(ii)].
• The goods are sold in the same condition they were in when imported [66(a)(iii)].
• Reduced Rates for Specific Export Services: For certain periods, income from services rendered outside Pakistan and construction contracts executed outside Pakistan were charged at 50% of the rates specified in Division III of Part III of the First Schedule, provided receipts from services and income from contracts were brought into Pakistan in foreign exchange through normal banking channels.
• Exclusion from Minimum Tax on Turnover for SMEs: The provisions of Section 113 (minimum tax on turnover) do not apply to SMEs [135(7)]. Their export proceeds are subject to tax as per the rates prescribed for the final tax regime [135(6)].
• Adjustable Tax on Supply of Goods by SMEs: The tax deductible under clause (a) of sub-section (1) of section 153 shall not be minimum tax where payments are received on sale or supply of goods by SMEs [135(8)].
• General Exemption for Foreign-Source Salary of Residents: Any foreign-source salary received by a resident individual is exempt from tax if the individual has paid foreign income tax in respect of the salary [39(1)]. This includes situations where tax has been withheld by the employer and paid to the foreign revenue authority [39(2)].

4. Other Relevant Provisions

• Income from Business of Shipping (Resident Person): A resident person engaged in the business of shipping is charged a presumptive income tax based on tonnage [13(3), 14, 15, 16]. This can be a final tax [124(xi)].
• Ships and floating crafts purchased or bare-boat chartered and flying the Pakistan flag pay one US $ per gross registered tonnage per annum [14(a)].
• Ships, vessels, and floating crafts not registered in Pakistan and hired under any charter other than bare-boat charter pay fifteen US cents per ton of gross registered tonnage per chartered voyage, not exceeding one US $ per ton of gross registered tonnage per annum [14(b), 15].
• A Pakistan resident ship-owning company registered with SECP after November 15, 2019, having its own sea-worthy vessel registered under Pakistan Flag, pays seventy-five US Cents per ton of gross registered tonnage per annum [16(c)].
• Foreign Tax Credit (for Residents): Where a resident taxpayer derives foreign source income chargeable to tax in Pakistan and has paid foreign income tax on it, a tax credit is allowed. The credit amount is the lesser of the foreign income tax paid or the Pakistan tax payable on that income [39(1)].

It is important to note that tax collected or deducted under Section 154 and Section 154A is generally considered a final tax on the income arising from export transactions, provided certain conditions are met, such as filing returns and withholding tax statements, and not claiming foreign tax credits [73(2), 74(2)(d), 79(1)]. Where income tax is to be collected or paid in advance, it shall be so collected or paid [8(6)].

Understanding Income Tax Surcharges and Penalties

Based on the provided sources, there are two primary types of surcharges mentioned: a surcharge on high-earning persons and a default surcharge.

Here are the details for each:

1. Surcharge on High-Earning Persons

This type of surcharge is a direct tax on income above a certain threshold.

• Imposition: A surcharge is imposed on every individual and association of persons.
• Applicability: It applies where the taxable income exceeds rupees ten million.
• Rate: The rate is ten percent of the income tax imposed under Division I of Part I of the First Schedule.
• Historical Note (Omitted Section 4A): Previously, a surcharge was payable by every taxpayer at the rate of fifteen percent of the income tax payable for a specific period ending on June 30, 2011. This surcharge was to be paid, collected, deducted, and deposited in the same manner as other taxes. However, this provision (Section 4A) was omitted by the Finance Act, 2014.

2. Default Surcharge (Section 205)

The default surcharge is a penalty-like charge imposed for the late payment of taxes or other amounts, or for the failure to collect or deduct taxes. This is detailed under “PART XII DEFAULT SURCHARGE” in the sources.

• General Application (Section 205(1)):
• Liability: A person is liable for default surcharge if they fail to pay any tax (excluding advance tax under section 147 and default surcharge itself), any penalty, or any amount referred to in section 140 or 141, on or before the due date for payment.
• Rate: The rate is twelve percent or KIBOR plus three percent per annum, whichever is higher, on the unpaid amount.
• Computation Period: This surcharge is computed for the period commencing on the date the amount was due and ending on the date it was paid.
• Waiver for Appeals: If a person opts to pay the tax due based on an order under section 129 on or before the due date in a notice under section 137(2) issued as a consequence of that order, and does not file an appeal under section 131, they shall not be liable to pay default surcharge for the period beginning from the due date of payment in consequence of the appealed order to the date of payment in consequence of the subsequent notice.
• On Advance Tax (Section 205(1A) & (1B)):
• Failure to Pay Advance Tax: A person who fails to pay advance tax under section 147 is liable for default surcharge at the rate of twelve percent or KIBOR plus three percent per annum, whichever is higher. The surcharge is computed on the unpaid tax from the due date to the payment date or the due date of the income return, whichever is earlier.
• Insufficient Advance Tax Payment: If, for any tax year, a taxpayer fails to pay tax under section 147(4A) or (6), or if the tax paid is less than ninety percent of the tax chargeable for the relevant tax year, default surcharge applies. The rate is the same (twelve percent or KIBOR plus three percent per annum, whichever is higher) on the amount by which the tax paid falls short of ninety percent, or on the tax so chargeable.
• Calculation Period for Insufficient Advance Tax: This surcharge is calculated from the first day of April in that tax year to the date the assessment is made or June 30 of the next financial year, whichever is earlier. For a special tax year, the default surcharge is calculated from the first day of the fourth quarter of that special tax year until the assessment date or the last day of the special tax year, whichever is earlier.
• For Failure to Collect or Deduct Tax (Section 205(3)):
• Liability: A person who fails to collect tax (as required under Division II of Part V of Chapter X or Chapter XII) or deduct tax (as required under Division III of Part V of Chapter X or Chapter XII), or fails to pay an amount of tax collected or deducted by the due date as required under section 160, is liable for default surcharge.
• Rate: The rate is twelve percent or KIBOR plus three percent per annum, whichever is higher, on the unpaid amount.
• Computation Period: This is computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date it was paid to the Commissioner.
• Assessment and Refund:
• The Commissioner assesses any default surcharge imposed as if it were tax, and the provisions for tax assessment apply.
• The Commissioner may, at discretion, assess default surcharge for the full period of default or part thereof, even if the tax due has not actually been paid.
• Any default surcharge paid by a person shall be refunded to the extent that the tax, penalty, or other related amount is later held not to be payable.
• If the amount of tax or penalty for which default surcharge is chargeable is reduced by an order, the default surcharge levied shall be reduced accordingly.
• Effect of Extensions on Due Date:
• An extension of time granted for payment of tax due or permission to pay in instalments shall not change the due date for the purpose of charging default surcharge under section 205(1). Liability for default surcharge still arises from the original due date of the tax.
• Waiver and Exemption:
• The Board may make schemes for the waiver of default surcharge in respect of the recovery of tax arrears or withholding taxes.
• The Federal Government or the Board can, by notification in the official Gazette or by an order, exempt any person or class of persons from payment of the whole or part of the penalty and default surcharge payable, subject to specified conditions and limitations.

Company Taxation in Pakistan (2024)

The taxation of companies in Pakistan is governed by a comprehensive set of rules within the Income Tax Ordinance, 2001, as amended up to June 30, 2024. These provisions cover general tax rates, specific industry rules, special charges, various tax credits and exemptions, and procedural aspects.

Here are the details regarding company taxation:

1. General Tax Rates for Companies

The standard rates of tax imposed on the taxable income of companies are as follows:

• Small company: 20%
• Banking company: 39%
• Any other company: 29%

It is important to note that these rates were substituted by the Finance Act, 2022. Previously, rates varied, for instance, a banking company was taxed at 50%, a public company (other than banking) at 35%, and a private company (other than banking) at 45%. Historically, for companies other than banking companies, the rate gradually reduced from 35% in tax year 2007 to 29% for tax year 2019 and onwards, with specific rates for interim years. Small companies were previously taxed at 25%.

2. Specific Provisions for Certain Companies and Industries

• Banking Companies:
• Their income, profits, and gains, and the tax payable thereon, are computed according to the rules in the Seventh Schedule, applicable from tax year 2009 onwards.
• They are not subject to withholding tax provisions as a recipient of an amount on which tax is deductible.
• Income computed under the Seventh Schedule is charged under the “Income from Business” head at the rates specified in Division II of Part I of the First Schedule.
• Advance tax for banking companies is payable in twelve monthly installments by the 15th of every month.
• Minimum tax provisions (Section 113) apply to banking companies just as they do to any other resident company.
• From tax year 2015 onwards, dividend income and capital gains of banking companies are taxed at the rate specified in Division II of Part I of the First Schedule.
• For tax years 2020 and 2021, an enhanced rate of 37.5% applies to taxable income from additional investment in Federal Government securities, instead of the standard Division II rate. This requires a certificate from an external auditor.
• A reduced tax rate of 20% applies to taxable income from additional advances for low-cost housing for tax years 2020 to 2023, with a further reduction to 10% for advances to Naya Pakistan Housing and Development Authority schemes. An external auditor’s certificate is required.
• Similarly, a reduced tax rate of 20% applies to taxable income from additional advances for Farm Credit in Pakistan for tax years 2020 to 2023. An external auditor’s certificate is also required, and the Commissioner may request further details.
• Group relief (Section 59B) and group taxation (Section 59AA) are available to banking companies, provided the holding and subsidiary companies are banking companies, their accounts are audited by a State Bank of Pakistan (SBP) panel firm, and subject to SBP approval.
• Adjustments related to ‘Shariah Compliant Banking’ approved by the SBP will not reduce or add to income and tax liability, and a statement certified by auditors comparing Islamic and normal accounting principles must be attached to the return. Adjustments from applicable accounting standards, policies, or SBP instructions are generally excluded from taxable income computation, and notional gains/losses are not recognized until fully realized.
• Insurance Companies:
• Profits and gains from insurance business are computed according to the rules in the Fourth Schedule.
• They are explicitly excluded from the special provisions regarding capital gain tax on the disposal of listed securities (Section 37A and Section 100B).
• Oil, Natural Gas, and Other Mineral Deposits:
• Special provisions apply to their production, exploration, and extraction.
• Profits and gains from the exploration and extraction of wasting mineral deposits (excluding petroleum or natural gas), as specified by the Board with the Minister-in-charge’s approval, are computed according to Part II of the Fifth Schedule.
• Resident companies engaged in the exploration and extraction of specific mineral deposits, with undertakings set up between July 1, 1981, and June 30, 1998, benefit from a 50% reduction in tax rates for a five-year period immediately following their initial five years of commercial production.
• Small and Medium Enterprises (SMEs):
• A special procedure is provided for SMEs.
• Category-1 (annual business turnover up to Rs. 100 million): Taxed at 7.5% of taxable income. They may opt for a Final Tax Regime at 0.25% of gross turnover.
• Category-2 (annual business turnover exceeding Rs. 100 million but not exceeding Rs. 250 million): Taxed at 15% of taxable income. They may opt for a Final Tax Regime at 0.5% of gross turnover.
• The option for the Final Tax Regime is irrevocable for three tax years once exercised.
• Public vs. Private Companies:
• The Ordinance lays out principles for their taxation.
• There are specific provisions for the disposal of business by individuals or associations of persons to wholly-owned companies, and the disposal of assets between wholly-owned companies.
• In case a private company’s tax cannot be recovered, its directors (excluding employed directors) and shareholders (owning at least 10% of paid-up capital) are jointly and severally liable for the outstanding tax. These individuals can then seek recovery from the company or other liable parties. This liability is treated as tax due under an assessment order.
• If a private company defers salary payments to an employee for an earlier tax year, the Commissioner may include that amount in the employee’s income for the earlier year if there are reasonable grounds to believe the deferral occurred.
• Companies Not Appearing in Active Taxpayers’ List:
• Special rules in the Tenth Schedule govern the collection/deduction of advance income tax and the computation of income and tax payable for such persons (including companies) or those who have not filed their returns by the due date. These rules override other conflicting provisions in the Ordinance.
• However, these provisions do not apply to non-resident individuals holding Pakistan Origin Card (POC), National ID Card for Overseas Pakistanis (NICOP), or Computerized National ID Card (CNIC) who maintain a Foreign Currency Value Account (FCVA) or Non-resident Pakistani Rupee Value Account (NRVA) with authorized banks in Pakistan.
• Companies in Shipping Business (Resident):
• Are subject to a presumptive income tax. (Note: Historical provisions for tonnage tax based on gross registered tonnage have been omitted).
• Companies for Power Generation:
• Dividend income declared or distributed on shares of a company set up for power generation benefits from a reduced tax rate of 7.5%.
• Companies for Film-making:
• Historical tax reductions (50% for foreign film-makers, 70% for resident companies on film-making income) have been omitted by the Finance Act, 2021.

3. Special Taxes and Charges Applicable to Companies

• Surcharge on High-Earning Persons:
• Previously, a surcharge of 10% of the income tax was imposed on individuals and associations of persons with taxable income exceeding Rs. 10 million [previous version information].
• However, Section 4A, which contained this provision, was OMITTED by the Finance Act, 2014. Therefore, this surcharge is no longer in effect.
• Default Surcharge (Section 205):
• Companies are liable for default surcharge if they fail to pay any tax (excluding advance tax and default surcharge), penalty, or other specified amounts by the due date [previous response].
• The rate is 12% or KIBOR plus 3% per annum, whichever is higher, computed on the unpaid amount from the due date to the payment date [previous response].
• It also applies to failure to pay advance tax or insufficient advance tax payment (less than 90% of the tax chargeable) [previous response].
• Furthermore, it applies if a company fails to collect or deduct tax (e.g., withholding tax) or fails to deposit collected/deducted tax by the due date [previous response].
• The Commissioner assesses it as if it were tax, and it is refunded if the related tax is later found not payable [previous response].
• Crucially, an extension of time for payment does not alter the original due date for default surcharge calculation [previous response].
• For minimum tax calculation purposes, “Corporate Tax” excludes default surcharge and penalties.
• Tax on Undistributed Profits (Section 5A):
• For tax years 2017 to 2019, a tax of 5% of accounting profit before tax was imposed on public companies (excluding scheduled banks or modarabas) that failed to distribute at least 20% of their after-tax profits as cash dividends within six months of the tax year end.
• This provision does not apply if a company is restricted from distributing dividends due to an agreement with the Government of Pakistan.
• Minimum Tax (Section 113):
• Applies to resident companies, permanent establishments of non-resident companies, and certain individuals/AOPs with high turnover.
• It comes into play when the calculated tax payable for the year is below a certain threshold (e.g., due to losses).
• Specific minimum tax rates (as a percentage of turnover) apply to certain industries, including oil marketing companies, oil refineries, gas companies (with turnover over Rs. 1 billion), Pakistani airlines, poultry industry, fertilizer dealers/distributors, and online marketplaces.
• Historically, the purchase price of electricity for corporatized entities of WAPDA (DISCOs) and NTDC was excluded from turnover liable to minimum tax up to tax year 2013, but this clause has been omitted.
• Super Tax (Section 4C):
• This tax is specifically mentioned in relation to capital gains on the disposal of listed securities. The National Clearing Company of Pakistan Limited (NCCPL) computes and collects this tax at rates specified in Division IIB of Part I of the First Schedule on capital gains.
• Additional Tax (Section 99D):
• The Ordinance provides for an “Additional tax on certain income, profits and gains”, implying it can apply to companies, though specific details of its application are not provided in the sources.

4. Tax Credits and Exemptions for Companies

• Tax Credit for Investment (Section 65B):
• A company investing in plant and machinery for extension, expansion, balancing, modernization, or replacement in its industrial undertaking in Pakistan is allowed a credit equal to 10% of the invested amount against its tax payable (including minimum and final taxes). For tax year 2019, this rate was 5%. This credit can be carried forward to subsequent tax years.
• If the investment is solely in new plant and machinery (not for BMR), a credit of 20% of the invested amount is allowed against tax payable, in the year the machinery is installed.
• Tax Credit for Specified Industrial Undertakings (Section 65G):
• Eligible companies making specified capital investments receive a 25% investment tax credit against tax payable (including minimum and final taxes). Any unadjusted credit can be carried forward for up to two subsequent tax years.
• Exemptions under International Agreements (Section 44):
• Any Pakistan-source income that Pakistan is prevented from taxing under a tax treaty is exempt from tax under the Ordinance.
• Foreign Tax Credit (Section 103):
• A resident company can claim a tax credit for foreign income tax paid on foreign-source income taxable in Pakistan.
• The credit is limited to the lesser of the foreign income tax paid or the Pakistan tax payable on that income.
• It applies separately to each head of income.
• Any unutilized credit cannot be refunded, carried back, or carried forward.
• The foreign income tax must be paid within two years after the end of the tax year in which the foreign income was derived.
• Inter-Corporate Dividend within Group Companies:
• Income from inter-corporate dividends within group companies (entitled to group taxation under Section 59AA) is exempt, provided the group’s return has been filed for the tax year.
• Dividend Income and Long-Term Capital Gains of Venture Capital Funds:
• These are exempt from tax if derived from investments in zone enterprises (as defined in the Special Technology Zones Authority Act, 2021) for a period of ten years from the issuance of the license by the Authority to the zone enterprise.
• Non-Residents with Special Convertible Rupee Accounts (SCRA):
• Non-resident entities (excluding local branches/subsidiaries/offices of foreign banks/companies operating in Pakistan) are exempt from minimum tax (Section 113) and tax on profit on debt (Section 151) for receipts from Pak Rupee denominated Government and corporate securities and redeemable capital listed on a registered stock exchange, provided the investments were made exclusively from foreign exchange remitted via an SCRA.
• Capital gains arising to a non-resident company (without a permanent establishment in Pakistan) from investments in debt instruments and Government securities (including treasury bills and Pakistan investment bonds) through an SCRA are also exempt from certain advance tax provisions (Section 147(5B)).
• Tax deducted on profit on debt from specified debt instruments and government securities through an SCRA is considered final tax for non-resident persons without a permanent establishment in Pakistan.
• Sukuk-Related Exemptions:
• Specific Sukuk, like those issued by “The Second Pakistan International Sukuk Company Limited” and “Third Pakistan International Sukuk Company Limited,” are exempt from certain provisions related to currency conversion gains/losses (clause (d) of section 46). Other entities like “WAPDA First Sukuk Company Limited” and “Pakistan International Sukuk Company Limited” are also mentioned, implying potential exemptions.
• LNG Terminal Operators and Owners:
• These entities are listed, potentially indicating specific exemptions or special tax treatments.
• Income from Services and Construction Contracts Outside Pakistan:
• Income derived from services rendered outside Pakistan and construction contracts executed outside Pakistan is subject to 50% of the normal rates, provided the receipts are brought into Pakistan in foreign exchange through normal banking channels.
• Furthermore, income from technical services rendered outside Pakistan to a foreign enterprise is exempt if received in Pakistan in foreign exchange.

5. Provisions Related to Company Structure and Transactions

• Amalgamation/Merger:
• “Amalgamation” is defined to include mergers of banking companies, financial institutions, insurance companies, industrial undertakings, or service providers (non-trading), where at least one is a public company.
• Expenditure incurred by an amalgamated company on legal, financial advisory, and administrative costs related to the amalgamation process is deductible.
• If conditions of the amalgamation scheme (set by SBP/SECP/court) are not met, previously allowed loss set-offs or depreciation allowances become deemed income for the year the default is discovered.
• Generally, no gain or loss arises on the issue, cancellation, exchange, or receipt of shares due to a Scheme of Arrangement and Reconstruction under the Companies Act, 2017.
• Group Taxation (Section 59AA):
• 100% owned holding and subsidiary companies can irrevocably opt to be taxed as one fiscal unit.
• This is limited to companies locally incorporated under the Companies Act, 2017.
• Losses incurred prior to group formation are not eligible for this relief.
• The option is contingent on compliance with corporate governance and group designation rules specified by the Securities and Exchange Commission of Pakistan (SECP).
• The Board may establish rules for group taxation.
• As noted above, inter-corporate dividends within such groups are exempt.
• Group Relief (Section 59B):
• A subsidiary or holding company can surrender its assessed loss (excluding capital or brought-forward losses) to its holding company, subsidiary, or another subsidiary of the holding company.
• If surrendered losses are not adjusted, the surrendering subsidiary can carry them forward.
• Specific rules apply if the holding company’s ownership falls below certain thresholds within five years, requiring the company to offer previously untaxed profits.
• Cash transfers between companies for loss adjustments are not taxable events.
• Share transfers for group formation (with SECP/SBP approval) are also not taxable events, but third-party sales are.
• Controlled Foreign Company (CFC) Provisions (Section 109A):
• A non-resident company is considered a CFC if a resident person controls it, the tax paid by the CFC outside Pakistan is less than 60% of the tax payable in Pakistan, it does not derive active business income, and its shares are not traded on a recognized stock exchange.
• The income of a CFC is treated as taxable income of a resident taxpayer and is taxed at the rate specified in Division III of Part I of the First Schedule.
• The attributable income is calculated by a specific formula.
• Income below Rs. 10 million is considered small.
• CFC income is determined in its local currency and converted to Rupees at the State Bank of Pakistan rate on the last day of the tax year.
• Importantly, income taxed in Pakistan under CFC rules is not taxed again when received by the resident taxpayer in Pakistan.

6. Taxable Income Computation for Companies

• Heads of Income:
• Companies derive income under various heads, including “Income from Business,” “Income from Property,” “Capital Gains,” and “Income from Other Sources”.
• For resident companies, both Pakistan-source and foreign-source income are considered; for non-resident companies, only Pakistan-source income is relevant.
• Deductions:
• Generally, no deduction is allowed for any cess, rate, or tax paid or payable in Pakistan.
• Expenditure by a company exceeding Rs. 250,000 for a single account head, if not paid digitally from a notified business bank account, is not allowed as a deduction, with an exception for payments of taxes, duties, fees, fines, or other statutory obligations.
• Banking companies, Development Finance Institutions (DFIs), Non-Banking Finance Companies (NBFCs), or Modarabas are allowed a deduction for profit accruing on non-performing debts credited to a suspense account in accordance with Prudential Regulations.
• Capital Gains:
• Gains from the disposal of capital assets are chargeable to tax.
• Specifically, gains from the disposal of immovable property in Pakistan are chargeable at rates in Division VIII of Part I of the First Schedule.
• Capital gains from the disposal of securities (after July 1, 2010) are chargeable at rates in Division VII of Part I of the First Schedule. This does not apply to banking and insurance companies.
• Gains on the disposal of assets located in Pakistan by a non-resident company (even if alienation occurs outside Pakistan) are considered Pakistan-source income and are taxable. The person acquiring such an asset from a non-resident must deduct tax at 10% of the fair market value. If the non-resident company holds assets indirectly through a resident company, the resident company is responsible for collecting advance tax from the non-resident company.
• Profit on Debt:
• If a company’s business is to derive profit on debt, it is chargeable under “Income from Business,” not “Income from Other Sources”.
• Tax is deducted at source from profit on debt at rates specified in Division IA/IB of Part III of the First Schedule.
• Specific rates apply to non-resident sukuk holders and non-resident companies with SCRA accounts (as detailed in exemptions above).
• A zero percent tax rate applies to profit on debt covered under specific exemptions for non-resident individuals with POC/NICOP/CNIC from rupee accounts funded by foreign exchange.
• Unexplained Income or Assets:
• Any unexplained income or assets discovered by the Commissioner are included in the company’s income and taxed accordingly.

7. Collection and Recovery of Tax from Companies

• Advance Tax (Section 147):
• For companies, advance tax for a quarter is computed using a specific formula based on the company’s turnover. If the quarterly turnover is unknown, it’s assumed to be one-fourth of 120% of the turnover of the latest tax year for which a return has been filed.
• Failure to pay or insufficient payment of advance tax may result in default surcharge [previous response].
• Withholding Tax:
• Companies act as withholding agents for various payments, including profit on debt, fees for offshore digital services, capital gains, and brokerage/commission.
• Tax deducted on sale/supply of goods (under Section 153(1)(a)) is not a minimum tax if the recipient is a manufacturing company or a public company listed on a registered stock exchange.
• Tax deducted on execution of contracts (under Section 153(1)(c)) is adjustable if received by a public company listed on a registered stock exchange.
• Payments for advertisement services (to newspaper/magazine owners) and for sale of goods/execution of contracts by a public company listed on a registered stock exchange are exempt from minimum tax under Section 153(1)(b) (rendering of services).
• A company receiving tax collected or deducted from an association of persons is allowed a tax credit.
• Due Date for Payment:
• Section 137 addresses the due date for tax payments. (Specific dates are not detailed in the provided sources, but the section exists).
• Recovery of Tax:
• The Commissioner has powers to recover tax from a company’s property or through the arrest of the taxpayer.
• Tax can also be recovered by the District Officer (Revenue), from liquidators, or from persons holding money on behalf of a taxpayer.
• As mentioned, directors and major shareholders of private companies can be held jointly and severally liable for unrecovered tax.
• If a company’s tax liability arises in bankruptcy, it is considered a current expenditure and is paid before other creditors’ claims.

8. Administration and General Provisions

• Resident Company Definition:A company is a resident company if it is incorporated or formed under any law in Pakistan, or if the control and management of its affairs are situated wholly in Pakistan at any time during the year, or if it is a Provincial Government or Local Government in Pakistan.
• Income Tax Authorities:The administration involves various authorities such as the Board, Chief Commissioner Inland Revenue, Commissioner Inland Revenue, and Commissioner Inland Revenue (Appeals).
• Power to Amend Schedules/Exemptions:The Federal Government or the Board, by notification in the official Gazette, can amend the Second Schedule to grant exemptions or reductions in tax rates.

This comprehensive overview covers the primary aspects of company taxation as described in the provided sources.

Principles of Tax Exemption and Final Tax Regimes

Tax exemptions in the provided sources refer to specific incomes, classes of income, persons, or classes of persons that are not subject to income tax under certain conditions. The framework for these exemptions is primarily outlined in Part VII of Chapter III and extensively detailed in The Second Schedule.

Here’s a detailed breakdown of tax exemptions:

General Framework of Exemptions

• Inclusion in Total Income, but not Taxable Income: While a person’s “total income” includes income exempt from tax under the Ordinance, “taxable income” is derived by reducing total income by deductible allowances, meaning exempt income is not part of the amount subject to tax rates.
• Primary Source of Exemptions: The Second Schedule is the main repository for specifying incomes, classes of income, persons, or classes of persons that are:
• Exempt from tax under the Ordinance, subject to specified conditions and extent. This is covered in Part I of the Second Schedule.
• Subject to reduced tax rates (less than those in the First Schedule). This is covered in Part II of the Second Schedule.
• Allowed a reduction in tax liability. This is covered in Part III of the Second Schedule.
• Exempt from the operation of specific provisions of the Ordinance. This is covered in Part IV of the Second Schedule.
• Government Authority to Grant Exemptions: The Federal Government may, by notification in the official Gazette, amend the Second Schedule to grant exemptions, reduce tax rates, reduce tax liability, or exempt from the operation of any provision. However, such amendments only have legal effect if also provided for in the Ordinance.
• Information Collection: The Board has the authority to authorize government departments or agencies to collect and compile data regarding incomes from industrial and commercial undertakings that are exempt from tax.
• Exemption Certificates: The Commissioner can issue an exemption or lower rate certificate if an amount is exempt from tax under the Ordinance, is subject to a lower tax rate, or is subject to a one hundred percent tax credit. Persons required to collect or deduct tax must comply with such certificates.

Specific Exemptions from Total Income (as per sources)

• Agricultural Income: Any rent or revenue derived from land situated in Pakistan and used for agricultural purposes, and any income from land situated in Pakistan derived from agricultural operations, is exempt from tax.
• Diplomatic and United Nations Exemptions:Income of individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972, and the United Nations (Privileges and Immunities) Act, 1948, to the extent provided in those respective Acts.
• Any pension received by a citizen of Pakistan from former employment in the United Nations or its specialized agencies (including the International Court of Justice), provided the salary from such employment was exempt under the Ordinance.
• Foreign Government Officials: Salary received by an employee of a foreign government as remuneration for services rendered to such government is exempt, provided the employee is a citizen of the foreign country (not Pakistan), the services are similar to those performed by Federal Government employees in foreign countries, and the foreign government grants a similar exemption to Federal Government employees performing similar services in that country.
• Exemptions under International Agreements:Any Pakistan-source income that Pakistan is not permitted to tax under a tax treaty.
• Any salary received by an individual (not being a citizen of Pakistan) to the extent provided for in an Aid Agreement between the Federal Government and a foreign government or public international organization.
• Exemption under Foreign Investment (Promotion and Protection) Act, 2022: Investment or investors may be exempt or subject to tax at specific rates and in the manner specified under this Act.
• President’s Honours: Mentioned as an exemption, but specific details are not provided in the excerpts.
• Profit on Debt: Mentioned as an exemption, but specific details are not provided in the excerpts.
• Scholarships: Any scholarship granted to a person to meet the cost of their education is exempt from tax, unless the scholarship is paid directly or indirectly by an associate.
• Support Payments: Any income received by a spouse as support payment under an agreement to live apart is exempt from tax.
• Government Income: The income of the Federal Government, Provincial Governments, and Local Governments is exempt from tax.
• Foreign-Source Income: Exemptions exist for foreign-source income of short-term resident individuals and returning expatriates, though specific details are not provided in these excerpts.
• Association of Persons (AOP) Income: If the income of an association of persons is exempt and no tax is payable due to this exemption, the share received by a member out of the AOP’s income remains exempt.
• Tax Credit for Certain Organizations (Section 100C): Certain incomes of a trust, welfare institution, or non-profit organization are eligible for a tax credit (effectively making them exempt from tax), including:
• Donations, voluntary contributions, subscriptions.
• Income from house property.
• Investments in Federal Government securities.
• So much of the income chargeable under the head “income from business” as is expended in Pakistan for welfare activities, provided the exemption for business income is proportional to its contribution to the aggregate income from all eligible sources.
• Unexplained Foreign Exchange Remittances (Section 111): Any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million rupees in a tax year, encashed into rupees by a scheduled bank with a certificate from that bank, is not treated as unexplained income or assets.
• Omitted Exemptions (Illustrative): The sources mention several omitted clauses from the Second Schedule, indicating past exemptions such as amounts received as monthly installments from certain pension plans (if invested for 10 years), and specific interest income on foreign currency bearer certificates.

Limitations on Exemptions

• Original Recipient Rule (Section 55): Where any income is exempt from tax, the exemption is generally limited to the original recipient of that income and does not extend to any person receiving any payment wholly or in part out of that income, unless a specific provision to the contrary is stated in the Ordinance.
• Losses from Exempt Business Income (Omitted Provision): Historically, if a person’s business income was exempt due to a tax concession, any loss sustained during the exemption period could not be set off against the person’s taxable income after the exemption expired. While omitted, this highlights the principle of not benefiting from losses generated during exempt periods.
• Banking Companies (Fourth Schedule): Generally, exemptions and tax concessions available under the Second Schedule do not apply to the income of a banking company when computed under the Fourth Schedule, with some exceptions for accumulated business loss set-off.

Exemptions from Specific Tax Provisions (Part IV of Second Schedule)

• Minimum Tax (Section 113):The provisions of Section 113 regarding minimum tax do not apply to:
• National Investment (Unit) Trust.
• Collective investment schemes authorized or registered under the Non-banking Finance Companies (Establishment and Regulation) Rules, 2003.
• Real estate investment trusts approved and authorized under the Real Estate Investment Trust Regulations, 2015.
• Pension funds registered under the Voluntary Pension System Rules, 2005.
• Any other company in respect of turnover representing transactions in shares or securities listed on a registered stock exchange.
• Past Omissions: Several exemptions from minimum tax were previously provided but later omitted, such as for Provincial Governments, local authorities, and certain businesses.
• Alternative Corporate Tax (Section 113C): Exempt income is specifically excluded from accounting income for the purpose of computing Alternative Corporate Tax.
• Advance Tax Collection (General – Section 236O): Advance tax under certain chapters shall not be collected or deducted from:
• The Federal Government or a Provincial Government.
• A foreign diplomat or a diplomatic mission in Pakistan.
• A person who produces a certificate from the Commissioner that their income during the tax year is exempt.
• Advance Tax on Educational Institutions (Section 236A): Advance tax is not collected if the annual fee does not exceed two hundred thousand rupees, or on amounts paid by way of scholarship. It is also not collected from non-resident persons.
• Payments to Non-residents (Section 152): The provisions of Section 152 for payments to non-residents do not apply in the case of a Hajj Group Operator in respect of Hajj operations.
• Foreign Experts’ Income Tax: Income tax payable by a foreign expert may be exempted if such expert is acquired with the prior approval of the Ministry of Textile Industry.
• Depreciation (Section 22): The provisions of Section 22(8) regarding depreciation do not apply to the Civil Aviation Authority (CAA) in respect of assets transferred for the purpose of an ijara agreement.
• Opt-out from Final Tax Regimes: For certain types of income where tax is typically collected or deducted as a “final tax” (e.g., petroleum products, services, contracts, commissions), a person may opt out of the final tax regime and choose to file a return of total income under the normal tax regime. This is subject to conditions, such as ensuring that the minimum tax liability under the normal tax regime is not less than a specified percentage (e.g., 10% of commission or discount for petroleum products/commission income).

Income Subject to “Final Tax” (Effective Exemption from Normal Computation)

• When tax is collected or deducted as a final tax under Section 169 (or other provisions), the income is treated differently:
• It shall not be chargeable to tax under any head of income in computing the person’s taxable income.
• No deductions are allowed for expenditures incurred in deriving this income.
• The amount of the income is not reduced by any deductible allowances or the set-off of any loss.
• The tax deducted shall not be reduced by any tax credit allowed.
• Generally, there shall be no refund of the tax collected or deducted, unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable.
• For the purpose of minimum tax computation, “tax payable or paid” does not include tax already paid or payable in respect of deemed income which is assessed as a final discharge of tax liability under Section 169 or any other provision. This highlights that final tax regimes operate outside the regular taxable income calculation.

Income Tax Offenses and Penalties

The Income Tax Ordinance, 2001, provides a comprehensive framework for various offenses and their corresponding penalties, including monetary penalties and provisions for prosecution leading to fines or imprisonment. These details are primarily outlined in Chapter X, Part X (Penalty) and Part XI (Offences and Prosecutions) of the Ordinance.

Here are the details regarding penalties as per the provided sources:

I. General Penalties (Section 182 – Offences and Penalties Table)

The Ordinance specifies various offenses and their associated penalties:

• Failure to furnish a return of income as required under section 114 within the due date:
• Penalty is the higher of 0.1% of the tax payable in respect of that tax year for each day of default, or Rupees one thousand for each day of default.
• Minimum penalty is Rupees ten thousand for individuals with 75% or more income from salary, and Rupees fifty thousand in all other cases.
• Maximum penalty shall not exceed two hundred percent of tax payable by the person in a tax year.
• The amount of penalty is reduced by 75%, 50%, and 25% if the return is filed within one, two, and three months respectively after the due date or extended due date.
• “Tax payable” means tax chargeable on the taxable income based on assessment made or treated to have been made under sections 120, 121, 122, or 122D.
• Failure to furnish any statement required under section 165:
• Penalty of Rupees two thousand.
• Additional penalty of Rupees two hundred for each day of default after the imposition of the initial penalty.
• If no tax was required to be collected or deducted during the relevant period, the minimum penalty is ten thousand Rupees.
• Failure to furnish wealth statement or wealth reconciliation statement:
• Penalty of 0.1% of the taxable income per week or Rs. 100,000, whichever is higher.
• Failure to furnish a foreign assets and income statement within the due date (Section 116A):
• Penalty of 2 percent of the foreign income or value of the foreign assets for each year of default.
• Failure to furnish a return of income as required under sub-section (3) of section 117 within the time specified in the notice:
• Penalty is the higher of 0.1% of the tax payable for each day of default, or Rs. 1,000 per day of default.
• Minimum penalty is Rs. 10,000 for an individual and Rs. 50,000 in all other cases.
• Failure to issue cash memo or invoice or receipt when required:
• Penalty of five thousand rupees or three percent of the amount of the tax involved, whichever is higher.
• Failure to apply for registration:
• Penalty of ten thousand rupees.
• Failure of a trader or a shopkeeper required to apply for registration under this Ordinance to register or pay advance tax as specified in a special procedure scheme under section 99B:
• The shop of such person shall be sealed for seven days for the first default and for twenty-one days for each subsequent default.
• Failure to notify the changes of material nature in the particulars of registration:
• Penalty of five thousand rupees.
• Failure to deposit the amount of tax due or any part thereof in the time or manner laid down:
• Penalty of five percent of the amount of the tax in default for the first default.
• For the second default, an additional penalty of 25% of the amount of tax in default.
• For the third and subsequent defaults, an additional penalty of 50% of the amount of tax in default.
• If the person opts to pay the tax due on or before the due date in consequence of an order under section 129 and does not file an appeal under section 131, the penalty payable shall be reduced by 50%.
• Repeating erroneous calculation in the return for more than one year whereby amount of tax paid is less than the actual tax payable:
• Penalty of thirty thousand rupees or three percent of the amount of the tax involved, whichever is higher.
• No penalty shall be imposed to the extent of the tax shortfall occurring as a result of the taxpayer taking a reasonably arguable position.
• Failure to maintain records required:
• Penalty of ten thousand rupees or five percent of the amount of tax on income, whichever is higher.
• Failure to produce the record or documents on receipt of notice under section 177:
• On first notice: Penalty of twenty-five thousand rupees.
• On second notice: Penalty of fifty thousand rupees.
• On third notice: Penalty of one hundred thousand rupees.
• Failure to furnish the information required or to comply with any other term of the notice served under section 176 or 108:
• Penalty of twenty-five thousand rupees for the first default and fifty thousand rupees for each subsequent default.
• Making a false or misleading statement to an Inland Revenue Authority:
• Penalty of twenty-five thousand rupees or 50% of the amount of tax shortfall, whichever is higher.
• No penalty for tax shortfall in deemed assessments under section 120 if a reasonably arguable position is taken.
• Failure to comply with income tax general order issued by the Board (Section 114B):
• Penalty of fifty million rupees for the first default and one hundred million for each subsequent default. The effective date is notified by the Board.
• Denying or obstructing the access of the Commissioner or any authorized officer to premises, place, accounts, documents, computers or stocks:
• Penalty of fifty thousand rupees or fifty percent of the amount of tax involved, whichever is higher.
• Concealment of income or furnishing inaccurate particulars of such income:
• Penalty of one hundred thousand rupees or an amount equal to the tax which the person sought to evade, whichever is higher.
• No penalty for mere disallowance of a claim of exemption or deduction unless proved the claim was knowingly wrong.
• Failure to pay tax at the time of making payment as consideration of shares or at the time of registration of shares by the Securities and Exchange Commission of Pakistan or the State Bank of Pakistan, whichever is earlier (Section 37(6)):
• Penalty equal to fifty percent of the amount of tax involved.
• Obstructing any Income Tax Authority in the performance of official duties:
• Penalty of twenty-five thousand rupees.
• Contravention of any provision for which no penalty has been specifically provided:
• Penalty of five thousand rupees or three percent of the amount of tax involved, whichever is higher.
• Failure to collect or deduct tax as required or failure to pay the tax collected or deducted as required under section 160:
• Penalty of forty thousand rupees or 10% of the amount of tax, whichever is higher.
• If no tax was required to be deducted or collected, the minimum penalty is ten thousand Rupees.
• Failure to display NTN or business licence at the place of business (Sections 181C, 181D):
• Penalty of five thousand rupees.
• Reporting financial institution or reporting entity failing to furnish information or country-by-country report to the Board as required under section 107, 108 or 165B:
• Penalty of two thousand rupees for each day of default, subject to a minimum of twenty-five thousand rupees.
• Failure to keep and maintain document and information required under section 108 or Income Tax Rules, 2002:
• Penalty of ten thousand rupees for the first default, twenty-five thousand rupees for the second, and fifty thousand rupees for the third.
• Offshore tax evader involved in offshore tax evasion:
• Penalty of one hundred thousand rupees or an amount equal to two hundred percent of the tax which the person sought to evade, whichever is higher.
• Enabler enabling, guiding, advising or managing any person to design, arrange or manage a transaction or declaration which has resulted or may result in offshore tax evasion:
• Penalty of three hundred thousand rupees or an amount equal to two hundred percent of the tax which was sought to be evaded, whichever is higher.
• Person involved in asset move as defined in clause (5C) of section 2 from specified territory to an un-specified territory:
• Penalty of one hundred thousand rupees or an amount equal to one hundred percent of the tax, whichever is higher.
• Reporting Financial Institution failing to comply with any provisions of section 165B or Common Reporting Standard Rules:
• Penalty of Rs. 10,000 for each default and an additional Rs. 10,000 each month until the default is redressed.
• Reporting Financial Institution filing an incomplete or inaccurate report under section 165B or Common Reporting Standard Rules:
• Penalty of Rs. 10,000 for each default and an additional Rs. 10,000 each month until the default is redressed.
• Reporting Financial Institution failing to obtain valid self-certification for new accounts or furnishes false self-certification:
• Penalty of Rs. 10,000 for each default and an additional Rs. 10,000 each month until the default is redressed.
• Reportable Jurisdiction Person failing to furnish valid self-certification or furnishes false self-certification:
• Penalty of Rs. 5,000 for each default and an additional Rs. 5,000 each month until the default is redressed.
• Company or Association of Persons contravening the provisions of Section 181E:
• Penalty of Rs. 1,000,000 for each default.
• Failure to integrate or perform roles and functions as specified, after being duly notified by the Board as SWAPS Agent (Section 237A):
• Penalty of five hundred thousand rupees or two hundred percent of the amount of tax involved, whichever is higher.
• Failure to integrate business for monitoring, tracking, reporting or recording of sales, services and similar business transactions with the Board or its computerized system (Section 237A):
• Penalty up to one million rupees, and if the offense continues after two months of penalty imposition, business premises shall be sealed until integration.
• Company and an association of persons failing to fully state all relevant particulars/information in the return, or furnishing blank/incomplete annexures/statements/documents:
• Penalty of Rs. 500,000 or 10% of the tax chargeable on the taxable income, whichever is higher.

II. General Provisions for Penalties

• Penalties specified in the table for Section 182 are applied consistently and no penalty is payable unless an order in writing is passed by the Commissioner, Commissioner (Appeals), or the Appellate Tribunal after providing an opportunity of being heard.
• If the taxpayer admits their default, they may voluntarily pay the amount of penalty due.
• It is clarified that establishing mens rea (guilty mind) is not necessary for levying of penalty under this section.
• If the amount of tax in respect of which any penalty is payable is reduced in consequence of any order under the Ordinance, the amount of penalty shall be reduced accordingly.

III. Penalty for Return Not Filed Within Due Date (Section 182A)

• Notwithstanding other provisions, if a person fails to file a return of income under section 114 by the due date or by the extended date, the Commissioner may impose a penalty. (Specific penalty amounts are detailed above under “Failure to furnish a return of income”).

IV. Exemption from Penalty and Default Surcharge (Section 183)

• The Federal Government (by notification) or the Board (by order, with recorded reasons) may exempt any person or class of persons from payment of the whole or part of the penalty and default surcharge payable under the Ordinance, subject to specified conditions and limitations.

V. Recovery of Tax Collected or Deducted (Section 161)

• Where a person fails to collect tax or deduct tax from a payment as required, or fails to pay tax collected or deducted, the Commissioner may recover the amount from that person as if it were tax due from them.
• The person held personally liable for an amount of tax due to failing to collect or deduct it is entitled to recover that tax from the person from whom it should have been collected or deducted.
• The Commissioner may amend a recovery order if deemed erroneous and prejudicial to revenue, after providing an opportunity of being heard.

VI. Offences and Prosecutions (Resulting in Fines and/or Imprisonment)

The Ordinance also outlines various offenses that, upon conviction, can lead to fines, imprisonment, or both, which are distinct from administrative monetary penalties but are categorized under “Offences and Penalties” in the Ordinance structure:

• Prosecution for non-compliance with certain statutory obligations (Section 191): Failing to comply with notices (e.g., related to returns, wealth statements, advance tax, information, or tax collection/deduction). Punishable with fine or imprisonment for a term not exceeding one year, or both. Continued failure to furnish returns/wealth statements can lead to a further offence punishable with a fine not exceeding fifty thousand rupees or imprisonment for a term not exceeding two years, or both.
• Prosecution for failure to furnish information in return of income (Section 191A): Companies or associations of persons failing to fully state particulars, furnishing blank/incomplete particulars or annexures in their return. Punishable with fine or imprisonment for a term not exceeding one year or both.
• Prosecution for non-registration (Section 191B): Any person required to apply for registration who fails to do so. Punishable with imprisonment for a term not exceeding six months or fine or both.
• Prosecution for false statement in verification (Section 192): Making a false statement in verification in any return or document, knowing or believing it to be false. Punishable with fine up to hundred thousand rupees or imprisonment for a term not exceeding three years, or both.
• Prosecution for concealment of income (Section 192A): Concealment or furnishing inaccurate particulars of income with a revenue impact of Rs. 500,000 or more. Punishable with imprisonment up to two years or with fine or both.
• Prosecution for concealment of an offshore asset (Section 192B): Failure to declare or furnishing inaccurate particulars of an offshore asset with a revenue impact of Rs. 10 million or more. Punishable with imprisonment up to three years or with a fine up to five hundred thousand Rupees or both.
• Prosecution for failure to maintain records (Section 193):
• Where the failure was deliberate: fine not exceeding fifty thousand rupees or imprisonment for a term not exceeding two years, or both.
• In any other case: fine not exceeding fifty thousand rupees.
• Prosecution for improper use of National Tax Number Certificate (Section 194): Knowingly or recklessly using a false NTN Certificate, including another person’s. Punishable with a fine not exceeding fifty thousand rupees or imprisonment for a term not exceeding two years, or both.
• Prosecution for making false or misleading statements (Section 195): Making a false/misleading statement or omitting material information to an income tax authority.
• If made knowingly or recklessly: fine or imprisonment for a term not exceeding two years, or both.
• In any other case: fine.
• Prosecution for non-compliance with notice under section 116A (Section 195A): Failure to comply with a notice under sub-section (2) of section 116A. Punishable with imprisonment up to one year or with a fine up to fifty thousand Rupees or both.
• Prosecution for enabling offshore tax evasion (Section 195B): An enabler guiding, advising, or managing a transaction/declaration resulting in offshore tax evasion. Punishable with imprisonment for a term not exceeding seven years or with a fine up to five million Rupees or both.
• Prosecution for obstructing an income tax authority (Section 196): Obstructing an income tax authority in discharge of functions. Punishable with fine or imprisonment for a term not exceeding one year, or both.
• Prosecution for disposal of property to prevent attachment (Section 197): Disposing of property after receiving notice from Commissioner to prevent attachment. Punishable with fine up to hundred thousand rupees or imprisonment for a term not exceeding three years, or both.
• Prosecution for unauthorised disclosure of information by a public servant (Section 198): Disclosing particulars in contravention of the Ordinance. Punishable with a fine of not less than five hundred thousand rupees or imprisonment for a term not exceeding one year, or both.
• Prosecution for abetment (Section 199): Knowingly and willfully aiding, abetting, assisting, inciting, or inducing another person to commit an offence. Punishable with fine or imprisonment for a term not exceeding three years, or both.
• Offences by companies and associations of persons (Section 200): If a company commits an offence, every person responsible for its conduct at the time is also deemed guilty.

Pakistan Income Tax Regimes and Regulations

Based on the sources, here are the details regarding different tax regimes under the Income Tax Ordinance, 2001:

The Income Tax Ordinance, 2001, is a comprehensive law that consolidates and amends income tax regulations in Pakistan, effective as of June 30, 2024. It imposes income tax for each tax year on every person who has taxable income.

Income is generally categorized under various Heads of Income for taxation purposes, including:

• Salary
• Income from Property
• Income from Business
• Capital Gains
• Income from Other Sources

Income of a resident person considers both Pakistan-source and foreign-source income, while for non-residents, only Pakistan-source income is considered.

Here are the details on various tax regimes:

1. Normal Tax Regime

This is the standard method of computing tax on a person’s taxable income.

• Imposition: Income tax is imposed at the rate or rates specified in Division I or II of Part I of the First Schedule on every person with taxable income for the year.
• Computation of Taxable Income:
• A person’s income chargeable to tax is computed based on their regularly employed method of accounting.
• Companies are required to account for income chargeable under “Income from Business” on an accrual basis, while other persons may use either cash or accrual basis.
• The Board may prescribe the accounting method for any class of persons.
• Adjustments are made when the accounting method changes to ensure no item is omitted or double-counted.
• Income is derived when received (cash basis) or due (accrual basis), and expenditure is incurred when paid (cash basis) or payable (accrual basis).
• Rates of Tax for Individuals and Association of Persons (Division I of Part I of the First Schedule):
• The rates are set out in a table with different slabs based on taxable income.
• For taxable income up to Rs. 600,000, the rate is 0%.
• Rates progressively increase with income, up to 35% for taxable income exceeding Rs. 4,000,000.
• For professionals (e.g., doctors, lawyers, etc., appearing on the Active Taxpayers’ List) with income exceeding Rs. 50 million, and who are members of a recognized professional body, the maximum rate is 40% instead of 45%. (Note: The 45% rate is not explicitly detailed in the provided table for individuals, but the 40% reduction implies its existence).
• Rates of Tax for Companies (Division II of Part I of the First Schedule): These rates exist, but the specific percentage breakdown for companies is not provided in the excerpts.

2. Final Tax Regime (FTR)

Under this regime, the tax collected or deducted at source is considered the final tax liability for the income, meaning no further tax is due on that income, and it is generally not adjustable or refundable.

• General Application: This section applies where the tax required to be deducted is a final tax under specific provisions of the Ordinance.
• Incomes/Payments Subject to FTR (or treated as such):
• Return on Investments in Sukuks (Section 5AA): Tax is imposed on persons receiving returns on Sukuks from a special purpose vehicle or a company. The tax is computed by applying the relevant rate to the gross amount of the return.
• Rates (Division IIIB of Part I of the First Schedule):
• 25% if the Sukuk-holder is a company.
• 12.5% if the Sukuk-holder is an individual or association of persons and the return is more than one million.
• 10% if the Sukuk-holder is an individual or association of persons and the return is less than one million.
• Income from Sukuks taxed under Section 5AA is not chargeable to tax under “Income from Business”.
• Certain Payments to Non-residents (Section 6): Tax is imposed on non-resident persons receiving Pakistan-source royalty, fee for offshore digital services, fee for money transfer operations, card network services, payment gateway services, interbank financial telecommunication services, or fee for technical services. The tax is computed by applying the relevant rate to the gross amount of receipts.
• Rates (Division IV of Part I of the First Schedule):
• 15% of the gross amount of royalty or fee for technical services.
• 10% in any other case.
• This section does not apply if the income is effectively connected with a permanent establishment in Pakistan, in which case it is treated as income from business.
• These incomes are not chargeable to tax under “Income from Business”.
• Shipping and Air Transport Income of a Non-resident Person (Section 7): Tax is imposed on non-resident persons operating ships or aircrafts for carriage of passengers, livestock, mail, or goods embarked in Pakistan or received in Pakistan for goods embarked outside Pakistan. The tax is computed by applying the relevant rate to the gross amount.
• Rates (Division V of Part I of the First Schedule):
• 8% for shipping income.
• The rate for air transport income is implied by Division V, but not specifically given a percentage in the excerpt.
• These incomes are not chargeable to tax under “Income from Business”.
• Tax on Builders and Developers (Sections 7C, 7D, 7F):
• Section 7C (Builders): Tax is imposed on the construction and sale of residential, commercial, or other buildings, computed by applying the relevant rate to the area of the building.
• Section 7D (Developers): Tax is imposed on the development and sale of residential, commercial, or other plots, computed by applying the relevant rate to the area of the plots.
• Section 7F: Income, profits, and gains of a builder or developer from a project are exempt from sections 113 and 113C (Minimum Tax on Turnover). Any tax paid under this section is not refundable or adjustable against any other tax liability. This indicates a final tax regime.
• The Eleventh Schedule provides specific rules for computation of profits and gains of builders and developers and the tax payable thereon.
• Payments for Goods or Services (Section 153(6)): The tax deducted under this section is generally a final tax on the income of a resident person arising from the specified transactions.
• Toll Collection (Section 235(3)): Tax collected on a lease of the right to collect tolls is a final tax.
• Small and Medium Enterprises (SMEs) (Fourteenth Schedule): SMEs have the option to be taxed under a final tax regime.
• Rates (of gross turnover):
• Category-1 (annual business turnover not exceeding Rs. 100 million): 0.25%.
• Category-2 (annual business turnover exceeding Rs. 100 million but not exceeding Rs. 250 million): 0.5%.
• This option, once exercised, is irrevocable for three tax years.
• Traders (Section 99A and Ninth Schedule): Traders can opt to be assessed under this Schedule instead of the general Ordinance provisions. If they opt for this, the Commissioner is deemed to have made an assessment of income and tax due as computed under specific rules in the Schedule. This often involves a presumptive or final tax based on working capital or total turnover for specific tax years.

3. Minimum Tax Regime (MTR)

This regime ensures that certain taxpayers pay a minimum amount of tax, even if their computed tax liability under the normal regime is low or they have a loss.

• Section 113 (Minimum Tax on the Income of Certain Persons):
• Applicability: Applies to resident companies, permanent establishments of non-resident companies, individuals with a turnover of Rs. 100 million or more (from tax year 2017 onwards), and associations of persons with a turnover of Rs. 100 million or more (from tax year 2017 onwards).
• Trigger: It applies if, for any reason (including a loss), the tax payable or paid is less than a specified percentage of the person’s turnover from all sources for that year. The specific percentage rate is not provided in the excerpt.
• Exclusions from “tax payable or paid” for MTR calculation: This does not include tax already paid or payable in respect of deemed income that is assessed as a final discharge of tax liability (e.g., under Section 169). It also excludes Super Tax paid under Section 4B or 4C.
• Banking Companies: The provisions of Section 113 apply to banking companies as they do to any other resident company.
• Profit on Debt (Section 151): Tax deductible under this section is a minimum tax on the profit on debt, unless the taxpayer is a company or the profit on debt is taxable under Section 7B. This implies it’s a minimum tax for individuals/AOPs unless specifically covered otherwise.
• Rent of Machinery (Section 236S): The tax deductible under this section is a minimum tax on the income of the resident person.

4. Presumptive Tax Regime (PTR)

This involves taxation based on certain presumptions, often gross receipts or other metrics, rather than detailed income and expenditure computations. Some FTR provisions can also be considered presumptive in nature.

• Tax on Shipping of a Resident Person (Section 7A): A presumptive income tax is charged on any resident person engaged in the business of shipping. The excerpt does not provide the specific rates or computation method for this presumptive tax.

5. Super Tax

This is an additional tax levied on certain categories of persons.

• Super Tax for Rehabilitation of Temporarily Displaced Persons (Section 4B): Imposed for tax years 2015 onwards, at rates specified in Division IIA of Part I of the First Schedule, on income of specified persons. This tax is paid, collected, and deposited according to Section 137.
• Super Tax on High Earning Persons (Section 4C): Imposed at rates specified in Division IIB of Part I of the First Schedule. This is a separate levy on high-earning individuals/AOPs.

6. Impact of Active Taxpayers’ List (ATL)

The Active Taxpayers’ List (ATL) influences the rates of tax for certain transactions.

• General Rule for Non-ATL Persons (Section 100BA, Tenth Schedule):
• For persons not appearing on the active taxpayers’ list (or those appearing but have not filed their return by the due date), the rate of tax required to be deducted or collected under any provision of the Ordinance is increased by one hundred percent of the specified rate.
• This rule does not apply to the advance tax collected under Section 231B (advance tax on motor vehicles).
• There are also specific property tax rates in the Tenth Schedule for non-ATL persons, based on fair market value (6% to 8% for properties over Rs. 50 million). These higher rates for non-ATL persons do not apply if the person has filed returns for all of the last three preceding tax years.

7. Tax Treaties and Double Taxation Avoidance

• The Federal Government may enter into tax treaties, tax information exchange agreements, or multilateral conventions for the avoidance of double taxation, prevention of fiscal evasion, or assistance in the recovery of taxes. These agreements can provide relief from tax payable under the Ordinance.

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By Amjad Izhar
Contact: amjad.izhar@gmail.com
https://amjadizhar.blog

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