Pakistan has a comprehensive tax system that businesses and individuals should understand before expanding or earning income in the country. In this article, we will discuss the three main types of taxes in Pakistan: Personal taxes, Corporate taxes, and Value Added Taxes.
Personal Taxes in Pakistan
The tax base for individuals in Pakistan is residential status. If a person is a resident in a particular tax year, all their income, whether from foreign sources or locally earned, is taxable. Non-residents, on the other hand, are only taxed on Pakistani source income. The Tax Year in Pakistan starts from July 01 and ends on June 30th.
The status of being a resident taxpayer is determined by the number of days of physical stay in Pakistan. If an individual stays in Pakistan for 183 days or more in a tax year, they are considered a resident taxpayer. Federal employees, even if stationed abroad, are treated as residents by law.
Pakistani personal taxes are progressive in nature and are divided into slab rates for individuals and associations of persons operating in the country. These rates are modified on a yearly basis through the Finance Act. If an individual earns both salary and business income, the percentage of income earned from each source determines if they will be treated as a salaried or business individual. Currently, if an individual’s income from salary is more than 75% of their total income, salary tax rates will be applicable to them.
Corporate Taxes in Pakistan
A company is considered a resident if it is incorporated in Pakistan or its entire management and control of business is in Pakistan. Non-resident companies may also be taxed if they are operating through a permanent establishment in Pakistan. Banking companies are taxed at 35%, other public companies at 29%, public companies at 29%, and small companies at 21%. These tax rates vary from year to year.
Value Added Taxes
Value-added taxes are charged on all goods and services, whether acquired from foreign or locally delivered. The value-added portion for companies is the difference between sale and the cost of purchase from another company. The rate of VAT for services varies from 13% to 16% throughout Pakistan. The VAT for goods is generally 16%, apart from some specialized goods whose rates are specifically mentioned under the law.
In conclusion, understanding the tax system in Pakistan is crucial for businesses and individuals. Personal taxes in Pakistan are based on residential status, with progressive slab rates for residents. Corporate taxes vary depending on the type of company and whether it is considered a resident or non-resident. Value-added taxes are charged on all goods and services, and their rates vary depending on the type of product or service provided. By understanding the tax system in Pakistan, businesses and individuals can ensure that they are complying with the law and avoiding any legal issues.