Understanding Tax Exemption on Profit on Debt for Non-Residents in Pakistan

As a non-resident earning income from profit on debt in Pakistan, it is important to understand the tax laws and exemptions available to you. The Income Tax Ordinance 2001 provides an exemption to non-residents on profit on debt under clause 78 and 79 in the second schedule, but certain criteria must be fulfilled to avail oneself of this exemption.

Clause 78 of the second schedule provides exemption on profit on debt derived from foreign currency accounts held with authorized banks in Pakistan or certificates of investment issued by investment banks in accordance with the Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan. This exemption is available to non-resident individuals, associations of persons, and companies.

Clause 79 provides exemption on profit on debt derived from a rupee account held with a scheduled bank in Pakistan by a non-resident individual holding a Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC). The deposits in the said account must be made exclusively from foreign exchange remitted into the said account.

To apply for the tax exemption, non-residents must provide a copy of their NICOP, proof of deposit of money through foreign currency, and details of the accounts on which profit is earned. The application for the exemption can be filed online through the iris portal under section 159 for tax year 2023.

After receiving approval from the commissioner, the exemption certificate is to be deposited to the relevant bank branch. The exemption time frame is subject to the discretion of the commissioner. Once the exemption has lapsed, the non-resident can reapply for the exemption.

It is important to note that non-residents who do not fulfill the criteria for tax exemption are liable to tax deduction at source as per section 151 and 7B. The normal tax rate on profit on debt for resident filers is 15%, while non-filers are subject to a 30% tax rate. By availing oneself of the tax exemption, non-residents can avoid tax deductions at source.

In conclusion, understanding the tax laws and exemptions available for non-residents earning income from profit on debt in Pakistan is crucial to avoid unnecessary tax deductions. By fulfilling the necessary criteria and providing the required documents, non-residents can apply for the tax exemption under clause 78 and 79 of the second schedule of the Income Tax Ordinance 2001.

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