Through the study of the Income Tax Ordinance, 2001 in general and the provisions of Section 80 of the Ordinance in particular, reveal the three types of persons to be treated under the Income Tax law of Pakistan.
An 1. Individual; 2. A Company or Association of Persons incorporated, formed, organized or established in Pakistan or elsewhere; 3. The Federal Government, a Foreign Government, a Political Sub-Division of a Foreign Government, or a Public International Organization.
Section 83 & 84 Income Tax Ordinance 2001 (Company & AOPs)
It is noteworthy that the incidence of taxation on above types depends on whether the taxpayer is a resident or a non-resident. An individual’s residency test revolves around the question of his overall stay in Pakistan in a tax year.
While for the serial no 2 & 3 mentioned above the test is based on his “control and administrative matters“. Also depends on whether located entirely and exclusively in Pakistan or not and in relation to this person.
It also depends on the basis of “permanent establishment” status. Based on the principles of residency, the current tax liability varies according to the taxpayer’s residency status.
Change of Definition of Resident Taxpayer (Section 82)
The Federal Board of Revenue (FBR) has reduced the length of stay of Pakistanis for tax collection purposes from 2015. By amendment in the Income Tax Ordinance 2001, in the Financial Year 2019-20 budget. FBR changed the definition of residents for tax purposes over the past financial years.
Resident & Non-resident person (Individual)
Prior to the Finance Act 2019, definition of a “resident” person for a tax year is, If he or she is in Pakistan for 183 days (more than six months) or more.
Now, this period reduced to just four months. Which means that a person will have to stay abroad for eight months to claim tax-free status. Non-resident Pakistanis are exempt from paying taxes, which a resident Pakistani have to pay.
However, through the budget, the government changed the definition and reduced the length of stay of individuals from 182 days to 119 days. Now, if a person stays in Pakistan for 120 days or more in a tax year, that person will be treated like a resident Pakistani.
Change of Definition of Resident Person (Stay period over a period of four years)
Not only that, through the Finance Act 2019, the FBR changed the total stay period to 365 days over a period of four years. Instead of affecting the legal changes from July 1, 2019, which mark the beginning of fiscal year 2019-20, the FBR has implemented these changes from tax year 2019, which is fiscal year 2018-19.
The amendment in law applicable from tax year 2020, states that the total period of 365 days for four years would be effective from 2015.
An individual is also a resident persons if he “is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.”
However, it is practice in tax law that substantive changes can only be made from prospectively instead of retrospectively.
New Definitions: offshore tax evasion, offshore asset, offshore enabler and asset mover
To increase its revenue collection from foreign sources, the FBR has also introduced new concepts in the budget, which are outlined in the Income Tax Circular. The FBR has introduced legal definitions of offshore tax evasion, offshore asset, offshore enabler and asset mover.
Any offshore asset is defined as moveable or immoveable asset, held, any gain, profit or income derived, or any expenditure incurred outside Pakistan. An offshore breach is one who owns, possesses, controls or is beneficial owner of an offshore asset and does not declare or provide such assets to the FBR.
Foreign-source income of short-term resident individuals (Section 50)
the foreign-source income of an individual shall be exempt from tax if:
(a) who is a resident individual solely by reason of the individual’s employment; and
(b) who is present in Pakistan for a period or periods not exceeding three years,
(2) This section shall not apply to —
(a) any income derived from a business of the person established in Pakistan; or
(b) any foreign-source income brought into or received in Pakistan by the person.
Foreign-source income of returning expatriates (section 51)
Any foreign-source income derived by a citizen of Pakistan in a tax year who was not a resident individual in any of the four tax years preceding the tax year in which the individual became a resident shall be exempt from tax under this Ordinance in the tax year in which the individual became a resident individual and in the following tax year.
Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year, any income chargeable under the head “Salary” earned by him outside Pakistan during that year shall be exempt from tax under this Ordinance.
Purchase of assets through banking channel
The FBR has also clarified the legal amendment regarding the purchase of assets through banking channels. Under the law, it is mandatory to purchase immovable property worth more than Rs 5 million through banking instruments to avoid 5% penalty.
Also, on cash purchases of assets over Rs. 1 million, such individuals will not be able to avail the benefits of depreciation, initial allowance, deductibles and deduction in pre-expenditure expenses. The FBR will treat such allowances as income, if purchased on cash.
Certain exemptions to non-residents (Part 1 Second schedule)
Clause (72) exempts any profit on debt payable to a non-resident person.
Clause (75) Any income of an agency of a foreign Government, a foreign national (company, firm or association of persons), or any other non-resident person from profit on moneys borrowed under a loan agreement or in respect of foreign currency instrument approved by the Federal Government.
Clause (117) exempts any income derived by a person from plying of any vehicle registered in the territories of Azad Jammu and Kashmir.
Clause (135A) any income derived by a non-resident from investment in OGDCL (Oil and Gas Development Corporation Limited) exchangeable bonds.
EXEMPTION FROM SPECIFIC PROVISIONS (PART IV Second schedule)
(101A) Section 231A shall not apply to a Pak Rupee account if the deposits in the account are made solely from foreign remittances.
(101AA) Sections 231A, 231AA and 236P shall not apply to a Pak Rupee Account to the extent of foreign remittances credited into such account.
(111A) Section 100BA and rule 1 of the Tenth Schedule shall not apply on the payment of dividend to non-resident persons.
(112) Section 236P shall not apply to special convertible rupee account (SCRA) of a non resident company having no permanent establishment in Pakistan.
(112A) Section 236P shall not apply to a non-resident rupee account repatriable (NRAR) or a foreign currency account maintained with a banking company in Pakistan.
(113) Sub-section (5B) of sections 147 shall not apply in respect of capital gains arising to a non-resident company having no permanent establishment in Pakistan.
(114) Section [“clause (ae) of sub-section (a) of section 114”] and 181 shall not apply to a non-resident company having no permanent establishment in Pakistan.
(114A) Clause (ae) of sub-section (1) of section 114 and section 181 shall not apply to a non-resident individual.
Other tax provisions of foreign source income
- Foreign source salary of resident individuals (Section 102)
- A Foreign tax credit (Section 103)
- Foreign losses (104)
- Taxation of a permanent establishment in Pakistan of a non-resident person (Section 105)
Foreign Remittances up to Rs5 Million (Section 111(4)(a) of the Income Tax Ordinance 2001)
According to section 111 of Income Tax Ordinance 2001, that deals with unexplained income of individuals and companies. The condition is not applicable under Section 111(4)(a) on the foreign remittances brought into Pakistan through normal banking channel.
Section 111(4)(a) of the Income Tax Ordinance 2001, further explains that, if the amount of foreign exchange remitted from outside Pakistan is equivalent, in rupees terms, up to Rs5 million in a tax year, the source of such foreign remittances cannot be asked,”
“111(4) Sub-section (1) does not apply,— (a) to any amount of foreign exchange remitted from outside Pakistan through normal banking channels [not exceeding [five] million Rupees in a tax year] that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.”
Foreign remittances exceeding Rs 5 million do not attract any addition to income chargeable to tax. Only if the foreign remittance”s source is not explainable, such amount will be added in income chargeable to tax.
Taxation of Foreign Source Income of Residents
Section 102 of the Ordinance provides exemption to the foreign source salary of resident individuals. If they have paid foreign income tax or tax was withheld at source and paid to the revenue authority of the foreign country.
Section 103 of the Ordinance states that where a taxpayer resident in Pakistan has paid foreign income tax. He shall be allowed a tax credit equal to or lesser of—
(a) foreign tax paid, or
(b) Pakistan tax payable in respect of that income.
Taxation rates of Payments to non-residents (Section 152 of Income Tax Ordinance 2001)
- For Royalties and fee for technical payments 15% (30% Non Filer).
- on the execution of contract ; a) under a construction, assembly or installation project in Pakistan b) construction or services rendered relating there to. c) advertisement services rendered by TV Satellite Channels. (7% of the gross amount.).
- insurance premium or re-insurance. 5% of gross amount filer (10% non filer).
- on Payments for advertisement services relaying from outside Pakistan.(10% of the gross amount).
- on remittance outside Pakistan, of fee for off-shore digital services , chargeable to tax u/s 6, on behalf of any resident or a permanent establishment of a non-resident in Pakistan.(5% of the gross amount).
- not otherwise specified above.(20% of the gross amount filer and 40% non filer).
Section 152(2A) payment to a Permanent Establishment of Non- Resident
- To a Permanent Establishment of Non- Resident. For: (a) Sale of goods (i) In case of a company 4% of the gross amount. (ii) Other than company cases 4.5% of the gross amount.
- In the cases of transport services, freight forwarding services, air cargo services, courier services, man power outsourcing services, hotel services, security guard services, software development services, IT Services and IT enabled services, tracking services, advertising services (other than by print or electronic media), share registrar services, engineering services, car rental services, building maintenance services, services rendered by Pakistan Stock Exchange Ltd. & Pakistan Mercantile Exchange Ltd., inspection and certification, testing & training services. (3% Filer & 6% Non-filer). In case of a company 8% filer (16% non filer- not in Active taxpayer list, ATL list). Other than company cases 10% filer and 20% for non filer.
- Execution of a contract other than a contract for sale of goods or providing/rendering of services. (i) In case of sports persons 10% filer & 20% non-filer (ii) Other than sports persons 7% filer & 14% non-filer.
Section 152A Payment for Foreign Produced Commercials
- Making payments for Foreign Produced Commercial for advertisement. 20% of the gross amount filer & 40% for persons not appearing in active taxpayer list.
Exemption from filing a tax return (section 115(3) )
The following persons shall not be required to furnish a return of income for a tax year (a) A widow;
(b) an orphan below the age of twenty-five years;
(c) a disabled person; or
(d) in the case of ownership of immovable property, a non-resident person.