When it comes to taxation in Pakistan, understanding one’s resident status is crucial. Resident individuals are taxed on their worldwide income, while non-resident individuals are taxed only on their Pakistan-sourced income. The Income Tax Ordinance 2001 defines a resident individual as someone who meets certain criteria, including staying in Pakistan for a certain period of time. However, the recently proposed finance bill for 2022-23 has added an additional clause that could change the way resident status is determined.
Here’s what you need to know about resident status for taxation in Pakistan:
What is a Resident Individual?
According to the Income Tax Ordinance 2001, an individual is considered a resident for tax purposes if they meet any of the following criteria:
- They are present in Pakistan for a period of 183 days or more in a tax year
- They are an employee or official of the federal government or a provincial government posted abroad in a tax year
- They are a citizen of Pakistan and not a tax resident of any other country.
The first two criteria are straightforward. If an individual spends 183 days or more in Pakistan in a tax year, they are considered a resident for tax purposes. Similarly, if they are an employee or official of the government posted abroad, they are also considered a resident for tax purposes.
However, the third criterion can be a bit more complicated. If an individual is a citizen of Pakistan but not a tax resident of any other country, they are considered a resident for tax purposes in Pakistan. This means that their worldwide income will be taxed in Pakistan.
What’s New in the Finance Bill 2022-23?
The finance bill for 2022-23 has proposed an addition to the third criterion mentioned above. If an individual is a citizen of Pakistan but not a tax resident of any other country, they will be considered a resident in Pakistan irrespective of the number of days they spend in Pakistan. This means that even if they stay outside of Pakistan for more than 183 days, they will still be taxed on their worldwide income in Pakistan.
To make it easier to understand, let’s take an example. Suppose a Pakistani citizen is living in Canada for more than 183 days, but they are not a tax resident there, meaning they are not paying regular taxes in Canada. According to the proposed finance bill, they will still be considered a resident in Pakistan and will have to pay taxes on their worldwide income in Pakistan.
Why Does Resident Status Matter?
Resident status is important because it determines the amount and type of taxes an individual needs to pay. As a resident, an individual is taxed on their worldwide income, which includes income earned in Pakistan as well as income earned outside Pakistan. On the other hand, non-residents are only taxed on their Pakistan-sourced income.
Additionally, resident status can also affect an individual’s tax exemptions and deductions. For example, resident individuals are eligible for certain tax credits and exemptions that non-residents may not be eligible for.
How to Determine Your Resident Status?
To determine your resident status, you need to look at the criteria mentioned above. If you have spent 183 days or more in Pakistan in a tax year, you are considered a resident for tax purposes. Similarly, if you are a government employee posted abroad, you are also considered a resident for tax purposes.
If you are a citizen of Pakistan and not a tax resident of any other country, you are considered a resident for tax purposes in Pakistan. However, with the proposed addition in the finance bill, this criterion may change, and even if you are not physically present in Pakistan for 183 days, you may still be considered a resident for tax purposes.
In conclusion, it is important for Pakistani citizens to understand the residency rules and tax implications set forth by the Income Tax Ordinance 2001. With the proposed addition of clause c in the Finance Bill 2022-23, it is now more crucial than ever to be aware of the tax laws and regulations. Regardless of the number of days spent outside of Pakistan, if a person is a citizen of Pakistan but not a tax resident of any other country, they will be considered a resident in Pakistan and their worldwide income will be subject to taxation. By staying informed and complying with the tax laws, individuals can avoid penalties and ensure a smooth tax filing process.
