Comprehensive Guide to Tax Exemptions in Pakistan (Income, Sales, Customs & Excise)

Tax exemptions in Pakistan play a vital role in shaping the country’s fiscal and economic framework. These exemptions are granted under the Income Tax Ordinance, Sales Tax Act, Customs Act, and Federal Excise Act, and provide much-needed relief to individuals, businesses, and organizations.

Depending on the nature of the case, exemptions may be full, partial, or based on reduced tax rates.They are specifically designed to support national priorities such as:

• Economic growth and industrial development
• Food security and disaster recovery
• Promotion of exports and IT services
• Implementation of international agreements and bilateral treaties

For taxpayers, understanding these exemptions is not just about saving money—it’s about legal compliance and maximizing available benefits. By knowing which incomes, goods, and services qualify, individuals and businesses can better manage their financial planning while contributing to Pakistan’s broader economic objectives.

1. Income Tax Exemptions

Income tax exemptions are extensive and cover various categories of income and taxpayers, often specified in the Second Schedule to the Income Tax Ordinance.

General Powers for Exemptions and Concessions

• The Federal Government or the Board, with the approval of the Federal Minister-in-charge (and sometimes the Economic Coordination Committee of the Cabinet), can amend the Second Schedule to grant exemptions, reduce tax rates, reduce tax liability, or exempt persons/income from certain provisions. This power is exercised for national security, natural disasters, food security, economic interests (due to abnormal international commodity price fluctuations), and for implementing bilateral/multilateral agreements.
• No provision in any other law providing tax exemption or reduction in tax rates/liability under the Income Tax Ordinance shall have legal effect unless also provided for in the Ordinance itself.
• Exemptions are generally limited to the original recipient of income and do not extend to subsequent payments made out of that income, unless specifically provided otherwise.

Exempt Incomes and Persons (Part I of Second Schedule)

• Salaries:
  • Income from salary received by non-citizen employees of the International Irrigation Management Institute (IIMI) in Pakistan, who were non-residents in the four preceding years.
  • Salary received by a non-citizen or non-resident health professional under a contract with Shaukat Khanum Memorial Hospital and Research Center, approved by the Federal Government.
  • Allowance or perquisite paid or allowed outside Pakistan by the Government to a citizen of Pakistan for rendering service outside Pakistan.
• Pensions and Gratuities:
  • Any amount received from an approved superannuation fund or gratuity fund, or an approved provident fund (subject to conditions related to retirement or disability).
  • Pensions granted to families and dependents of public servants or Armed Forces members who die during service.
• Official Perquisites and Allowances:
  • Perquisite of free residence provided by the Government to the President, Provincial Governors, and Chiefs of Staff of Pakistan Armed Forces.
  • Free conveyance and sumptuary (entertainment) allowance granted by Government to the Chiefs of Staff, Pakistan Armed Forces, and Corps Commanders.
  • Perquisites, benefits, and allowances received by a Judge of the Supreme Court or High Court.
  • Medical allowance (up to 10% of basic salary) if free medical treatment/hospitalization is not provided, or free/subsidized medical treatment provided by a hospital/clinic to its employees.
  • Free or subsidized education provided by an educational institution to children of its employees.
• Profit on Debt / Interest Income:
  • Profit received by a non-resident person on a security issued by a resident person where certain conditions are met, such as the security being registered with the SECP, publicly offered, not issued to an associate, and having a minimum maturity period.
  • Profit on Foreign Currency Bearer Certificates, Special US Dollar Bonds, or Pak Rupee accounts created from foreign currency deposits (historical, many clauses omitted).
  • Profit on debt payable by an industrial undertaking in Pakistan on money borrowed from foreign financial institutions or certain foreign government agencies.
  • Income derived by Islamic Development Bank from its operations in Pakistan.
  • Profit on debt and capital gains from Federal Government’s sovereign debt or a sovereign debt instrument, derived by any non-resident banking company approved by the Federal Government under a sovereign agreement.
• Capital Gains:
  • Capital gain on the disposal of modaraba certificates, redeemable capital instruments, or shares of a public company listed on a stock exchange in Pakistan, or Pakistan Telecommunications Corporation vouchers (exemption expired June 30, 2010).
  • Certain capital gains for individuals or non-resident persons, such as those on shares of public companies, units of mutual funds, or private equity and venture capital funds, under specific conditions.
  • Capital gains from the sale of immovable property held for more than four years.
• Business Income and Undertakings:
  • Income of the Federal Government, Provincial Government, and Local Government.
  • Profits and gains derived by LNG Terminal Operators and Terminal Owners for five years from commercial operations.
  • Income of Special Technology Zones Authority and Zone enterprises for a period of ten years.
  • Profits and gains derived by companies owning and managing Hydel Power Projects in Pakistan or Azad Jammu and Kashmir.
  • Income from exports of computer software, IT services, or IT-enabled services (up to June 30, 2025) provided 80% of export proceeds are brought into Pakistan in foreign exchange through banking channels.
  • Profits and gains derived by a Greenfield industrial undertaking for five years, subject to conditions on setup location and not being a reconstruction of an existing undertaking.
  • Income of a venture capital company, venture capital fund, and Private Equity and Venture Capital Fund.
  • Income derived by any subsidiary of the Islamic Development Bank wholly owned by it and set up in Pakistan engaged in owning and leasing of tankers.
  • Profits and gains derived from a project by a builder or developer and dividends paid out of these profits.
  • Small and Medium Enterprises (SMEs) are exempt from minimum tax on turnover under section 113.
• International Agreements and Specific Organizations:
  • Income of individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972, or the United Nations (Privileges and Immunities) Act, 1948.
  • Salary of an employee of a foreign government if they are a citizen of that country, perform similar services to Pakistan’s government employees abroad, and the foreign government grants similar exemption.
  • Pakistan-source income not permitted to be taxed under a tax treaty.
  • Salary of a non-citizen individual under an Aid Agreement with the Federal Government or a public international organization, if the project is grant-financed and income is paid from grant funds.
  • Income of any person on a case-to-case basis for official development assistance financed loans and grants-in-aid, subject to conditions.
  • Taxes on income (including capital gains), advance tax, withholding taxes, minimum and final taxes for qualified investment under the Foreign Investment (Promotion and Protection) Act, 2022, and for investors, shareholders, associates, and third-party lenders of such investments.
  • Provisions related to anti-avoidance (sections 108, 109, 110, 111, 112) may not apply to qualified investments under the Foreign Investment Act.
  • Income of the International Finance Corporation (IFC), Asian Development Bank (ADB), and ECO Trade and Development Bank.
  • Provisions of sections 113 and 151 shall not apply to the Supreme Court of Pakistan – Diamer Bhasha & Mohmand Dams – Fund.
  • Provisions of withholding tax (Division III of Part V of Chapter X and Chapter XII) not applicable to individuals/companies/AOPs resident in Tribal Areas until June 30, 2026.
• Miscellaneous:
  • Allowance attached to any Honour, Award, or Medal awarded by the President of Pakistan, or any monetary award granted by the President.
  • Scholarship granted to meet education costs, unless paid by an associate.
  • Support payments received by a spouse under an agreement to live apart.
  • Profit on debt paid on promissory notes and sales tax refund bonds.
  • Profit on debt paid on Pakistan Banao Certificate.
  • Profit on debt paid on bonds issued under the Federal Government Duty Drawback Bonds Rules, 2019.
  • Income of non-profit organizations approved under specific clauses.
  • Unexplained income or assets (Section 111) shall not apply in certain cases, e.g., foreign exchange remitted through normal banking channels up to five million rupees, or contributions to the Supreme Court of Pakistan – Diamer Bhasha & Mohmand Dams – Fund.
  • Bonus shares issued by companies quoted on a stock exchange (tax is final). Also, determination of value of bonus shares issued by unquoted companies.

Exemption from Specific Provisions (Part IV of Second Schedule):

• Minimum Tax (Section 113): Several entities are exempt from minimum tax on turnover, including Hub Power Company Limited, KotAddu Power Company Limited, companies qualifying for exemption for power generation, Provincial/Local Governments, Pakistan Red Crescent Society, Special Purpose non-profit companies, non-profit organizations, taxpayers with IT/software export income, resident persons engaged in shipping with tonnage tax, venture capital companies/funds, Modarabas, and certain entities operating in specified economic/industrial zones.
• Withholding Tax (Sections 148, 150, 151, 152, 153, 155, 156, 233, etc.):
  • Imports of certain goods may be exempt from advance tax under section 148, such as re-usable containers for re-export, specified petroleum products, raw materials for manufacturers (with reduced rates or exemptions via certificate), and goods specified by the Board.
  • Exemption or lower rate certificates can be issued by the Commissioner if an amount is exempt from tax, subject to a lower rate, or subject to a hundred percent tax credit. For companies, this certificate must be issued within fifteen days of application, or it is deemed issued automatically by Iris.
  • Specific exemptions from withholding for various payments:
    • Profit on debt paid on Bahbood Savings Certificate, Pensioner’s Benefit Account, and Shuhada Family Welfare Account.
    • Payments to a Special Purpose Vehicle for securitization or sukuk issuance.
    • Certain payments for carriage services by goods transport contractors.
    • Payments received by a start-up.
    • Commodity futures contracts listed on a Futures Exchange.
    • Payments by an exhibitor/distributor to a distributor/producer/importer of a feature film.
    • Purchase of used motor vehicles from the general public.
    • Payments to International Finance Corporation (IFC), Asian Development Bank (ADB), ECO Trade and Development Bank.
    • Payments to Pakistan Domestic Sukuk Company Ltd..
    • Withholding tax on exports for goods originating from certain areas like Khyber Pakhtunkhwa, FATA, and PATA, subject to conditions.
    • Cash payments for incidental business expenses to oil tanker crew.
    • Dividend paid to Transmission Line Projects.
    • Imports of certain goods (e.g., oxygen, oxygen cylinders) for a specific period.
    • Imports/exports within Border Sustenance Markets.
    • Payments to Agha Khan Development Network institutions.
    • Commission received by a retail branchless banking agent for Ehsaas Emergency Cash Transfer Programme.
    • Import or acquisition of aircraft by Pakistan International Airlines Corporation on wet or dry lease.
    • Sale/supply of goods by SMEs (tax deductible under section 153(1)(a) shall not be minimum tax).
• Capital Gains on Disposal of Securities (Section 37A and Eighth Schedule): Rules regarding general capital loss adjustment disallowances (Rule 13F), general payment procedures for capital gain tax (Rule 13H), and general record maintenance (Rule 13I) do not apply when the capital gains tax liability is discharged under the Eighth Schedule procedures [46(13)].
  • A person can opt out of the Eighth Schedule taxation scheme with the Commissioner’s prior approval (if the taxpayer is a filer). NCCPL will then provide details of capital gains and tax not collected by them to the Board [49(17), 49 (Proviso), 50(18A)].
  • Tax-neutral transfers (no capital gains tax collected):
    • Transfers by Federal or Provincial Government due to privatization [75(c)].
    • Transfer/transmission of securities upon the death of an individual [86(i)].
    • Transfers of securities by reason of a gift [88(k)].
    • Securities movements due to mergers or schemes of arrangement and reconstruction sanctioned by authorities [108(s), 109, 112(x)].
    • Portfolio transfers where ownership does not change [82(g)].
    • Rectification of erroneous transfers where no actual disposal occurred [90(l)].

2. Sales Tax Exemptions

Sales tax exemptions mainly fall under the Sixth Schedule and specific conditions or entities.

• General Exemption Power (Section 13):
  • Supply or import of goods specified in the Sixth Schedule is exempt, subject to conditions specified by the Federal Government.
  • The Federal Government can, for national security, natural disaster, food security, and bilateral/multilateral agreements, exempt any supplies or imports of goods or classes of goods from whole or part of the tax.
  • Exemption can be allowed from a previous date specified in the notification.
• Zero-Rating (Section 4 and Fifth Schedule):
  • Exported goods or goods specified in the Fifth Schedule are charged to tax at zero percent.
  • Supply of stores and provisions for consumption aboard a conveyance proceeding to a destination outside Pakistan (as specified in Customs Act, 1969).
  • Other goods as specified by the Federal Government.
  • Specific zero-rated items in Fifth Schedule: Supply to diplomats, diplomatic missions, privileged persons/organizations, supplies of raw materials/components for manufacturing in Export Processing Zones, supplies to exporters under Duty and Tax Remission Rules, and imports/supplies to Gwadar Special Economic Zone.
• Exemption from Penalty and Default Surcharge (Section 34A):
  • The Federal Government or the Board may exempt any person or class of persons from whole or part of penalty and default surcharge, subject to conditions.
• Exemption by General Practice (Section 65):
  • If the Federal Government is satisfied that tax was inadvertently not charged on a taxable supply due to general practice, or the amount collected was less than required, it may declare such tax or amount as exempt from recovery.
• Import of Plant and Machinery for Greenfield Industry (Rule 158H):
  • Registered persons can claim sales tax exemption on imported plant and machinery for Greenfield Industry as per Serial No. 150 of Table-1 of the Sixth Schedule to the Sales Tax Act, 1990.
• Diplomats and Privileged Persons (Chapter VIII of STR):
  • Zero-rated supplies to diplomats, diplomatic missions, privileged persons, and privileged organizations are allowed on a reciprocal basis. This requires an application with an exemption certificate from the Ministry of Foreign Affairs or an “FBR Booklet”.
  • Refund claims by these entities require original exemption order/certificate/FBR Booklet and original sales tax invoice.
• Grants-in-Aid (Chapter VIII-A of STR):
  • Exempt import or supply of goods to entitled organizations or agencies under grants-in-aid, subject to an exemption order from the Economic Affairs Division and an “Authorization for Exempt Supply” from the Inland Revenue officer.
• Exemption from Attachment (Rule 111A of STR):
  • Certain items are not liable to attachment and sale for tax recovery, including necessary wearing apparel, cooking vessels, beds, and personal ornaments.

3. Customs Duties Exemptions

Customs duties can be exempted generally by the government or for specific circumstances.

• General Power to Exempt (Section 19):
  • The Federal Government can exempt any goods imported into or exported from Pakistan (or specific ports/areas) from whole or part of customs duties, and remit fines/penalties, especially for national security, natural disaster, national food security, or protecting national economic interests.
  • Such notifications are effective from the specified day and must be placed before the National Assembly.
  • There is no right to exemption/refund based on promissory estoppel or unwritten commitments from government departments.
• Board’s Power in Exceptional Circumstances (Section 20 – Omitted):
  • Historically, the Board had power to grant exemptions in exceptional circumstances via special order, but this section has been omitted.
• Temporary Imports and Repayment of Duty (Section 21):
  • The Board can authorize delivery of temporarily imported goods without duty payment if they are for subsequent exportation.
  • It can also allow whole or partial repayment of duties paid on imported goods used in the production, manufacture, processing, repair, or refitting of goods meant for exportation or supply to industrial units/projects entitled to concessionary rates.
• Baggage:
  • Bona-fide baggage is exempt from duty.
  • Baggage of passengers and crew in transit may be transited without duty payment, subject to limitations and conditions.
• Specific Conveyances (Section 59):
  • Conveyances (other than vessels) that carry only baggage of occupants are exempt from certain provisions related to manifests and permission for departure.
  • Government or foreign government conveyances can be exempted by notification.
• Authorized Economic Operator (AEO) Program (Section 212A):
  • The Board may grant benefits to AEOs, including deferring collection of customs duties and condoning or substituting bank guarantees with other financial instruments.

4. Federal Excise Duty Exemptions

Federal Excise exemptions are outlined in the Federal Excise Act, 2005.

• General Exemption (Section 16):
  • All goods imported, produced, or manufactured in Pakistan and services provided/rendered, except those specified in the First Schedule, are exempt from whole excise duties.
  • Goods and services in the Third Schedule are conditionally exempt.
  • No adjustment (under section 6) is admissible for goods exempt from excise duty.
• Federal Government Power (Section 16(2)):
  • The Federal Government can, for national security, natural disaster, food security, and bilateral/multilateral agreements, exempt any goods or services from whole or part of the duty.
• Exemption from Default Surcharge and Penalties (Section 16(4)):
  • The Federal Government or the Board may exempt any person or class of persons from whole or part of default surcharge and penalties, subject to conditions.
• Zero-Rating and Drawback (Section 5):
  • The Federal Government can specify goods or classes of goods to be subject to a zero rate of duty or prohibit the payment of drawback/refund upon their exportation.
• Gwadar Port Related Exemptions (Table-I, Third Schedule):
  • Fuel, lubricants, and other items sold to or consumed by vessels/ships calling at Gwadar Port are exempt, subject to conditions and procedures, for a period of forty years. This also extends to companies (COPHCL, Gwadar International Terminals, Gwadar Marine Services, Gwadar Free Zone Company) and their contractors.
  • Equipment and material for Lahore Orange Line Metro Train Project are exempt, subject to conditions and certification.
• Border Sustenance Markets (Table-I, Third Schedule):
  • Specific goods supplied within the limits of Border Sustenance Markets established with Iran and Afghanistan are exempt.
• Telecommunication Services (Table-II, Third Schedule):
  • Certain charges on international leased lines or bandwidth services (excluding foreign satellite companies) used by software exporting firms registered with Pakistan Software Exporting Board are exempt.

In conclusion, Pakistan’s tax exemption regime is vast and multi-layered, covering a wide range of incomes, goods, and services across income tax, sales tax, customs duties, and federal excise duty. While exemptions provide significant relief, they are always subject to conditions and government oversight. Taxpayers should remain updated with the latest provisions to claim benefits legally and effectively. Consulting tax experts can help ensure compliance and maximize available exemptions under the current laws.