The income tax system in Pakistan can be complex, and one aspect that can cause confusion is the concept of minimum tax. Minimum tax is a form of taxation that applies to certain companies and individuals with high levels of turnover. In this article, we will break down the basics of minimum tax in Pakistan, including who needs to pay it and why.
What is Minimum Tax?
Minimum tax is a tax that is applied to resident companies, permanent establishments of non-resident companies, associations of persons, and individuals with a turnover of 100 million or more. The tax is applicable on the income from all sources, including income from business and other sources. The concept of minimum tax was introduced in Pakistan in the Income Tax Ordinance 2001.
Who Needs to Pay Minimum Tax?
The minimum tax is applicable to different entities in Pakistan. Let’s take a closer look at who needs to pay it.
A resident company is a company that is established and managed in Pakistan. If a resident company has a turnover of 100 million or more, it is required to pay minimum tax.
Permanent Establishments of Non-Resident Companies:
A non-resident company that has established a permanent establishment in Pakistan is also required to pay minimum tax if its turnover is 100 million or more.
Associations of Persons:
An association of persons, which is a group of two or more persons who join together to carry out a business or profession, is required to pay minimum tax if its turnover is 100 million or more.
Individuals are also required to pay minimum tax if their turnover is 100 million or more. This is a relatively new development, as previously minimum tax was only applicable to companies and associations of persons.
Why is Minimum Tax Applied?
The purpose of minimum tax is to ensure that companies and individuals with high levels of turnover pay a minimum amount of tax, regardless of their tax liabilities. This is because it is possible for companies and individuals to reduce their tax liabilities by claiming deductions, exemptions, or allowances. Minimum tax is a way to ensure that these entities still contribute to the national tax pool.
What is the Rate of Minimum Tax?
The rate of minimum tax for the tax year 2021 was 1.5% of turnover, while for the tax year 2022, it has been reduced to 1.25%. It is important to note that the rate of minimum tax can change with each tax year.
When is Minimum Tax Payable?
Minimum tax is payable when there is no tax payable due to the setting off of losses, adjustment of credits, depreciation, or amortization. This means that even if a company or individual has reduced their tax liabilities to zero, they are still required to pay minimum tax.
In conclusion, minimum tax is a form of taxation that is applicable to certain entities in Pakistan with high levels of turnover. The purpose of minimum tax is to ensure that these entities pay a minimum amount of tax, regardless of their tax liabilities. If you are a resident company, a permanent establishment of a non-resident company, an association of persons, or an individual with a turnover of 100 million or more, you are required to pay minimum tax. It is important to remember that the rate of minimum tax can change with each tax year, and that minimum tax is payable even when there is no tax payable due to the setting off of losses or adjustment of credits.