Income Tax Ordinance, 2001 provides for tax exemptions, tax credits, reduced tax rates, and reduction in tax liability. These tax exemptions are either based on specific type of taxpayers or for a particular time period. Significant tax credits and tax exemptions for the financial year 2021-2022 are given below:
Profits from an electric power generation project
Profits from an electric power generation project set up in Pakistan are exempt from tax. This exemption is available for taxpayers entering into agreement or to whom letter of intent is issued by Federal or Provincial Government, for setting up an electric power generation project in Pakistan up to June 30, 2021.
Profits from a transmission line project setup
Profits from a transmission line project setup in Pakistan on or after July 1, 2015 are exempt from income tax. This exemption is for a period of 10 years. Subject to condition that project should be setup by June 30, 2018. Now, such date is extended until June 30, 2022.
Profits by refineries
Profits by refineries, which are setup between 1 July 2018 and 30 June 2023. These have been exempted from tax for a period of 20 years Subject to certain conditions.
Low-cost housing projects
Low-cost housing projects have exemption of a reduction in tax liability by 50% of profits. Subject to certain conditions.
Housing Projects under Naya Pakistan Housing and Development Authority (NAPHDA) or under the Ehsaas Programme
Tax relief on profits of projects of low-cost housing developed or approved by the Naya Pakistan Housing and Development Authority (NAPHDA) or under the Ehsaas Programme. Tax reduction facility by reducing tax @90% of profits.
Green field industrial undertaking
A tax credit is available @25% of the amount invested to a green field industrial undertaking. Which is engaged in manufacturing or ship building and an industrial undertaking engaged in the manufacturing of machinery and equipment used for generation of renewable energy.
Business established in ‘special economic zones’
Income derived by a business established in ‘special economic zones’ is exempt from tax for a period of (10) ten years. This period is starting from commencement of commercial operations or production, subject to particular conditions. These ‘special economic zones’ have been established in different areas of the country.
liquefied natural gas terminal operators and terminal owners
Exemption on Profits by liquefied natural gas terminal operators and terminal owners are exempt from tax for a period of (5) five years starting from the date of commercial production.
Bagasse / biomass based cogeneration power project
Exemption on profit from a bagasse / biomass based cogeneration power project having certain level of capacity is made exempt from income tax. While, reduced withholding tax rate (7.5%) is on payment of dividend by these business units subject to some certain conditions.
New deep conversion refineries
Profit earned by new deep conversion refineries (approved by Federal Government before Dec 31, 2021) have also been exempted from income tax for 20 years (10 years for existing refineries from date of up gradating) subject to certain conditions.
National Power Parks Management Company (Private) Limited
Profit from a sale of electricity by National Power Parks Management Company (Private) Limited or by its demerged units have been exempted from income tax starting from commercial operations dates and will continue after the dates of change of ownership through privatization.
Foreign Remittances through banking channel in foreign currency…..
Foreign remittance sent to Pakistan through banking channel in foreign currency to an international buying house from its non-resident principal. For the purpose of his expenses in Pakistan are made exempt from income tax.
Expert by an international buying house
Salary received by a person who, not being a citizen or resident of Pakistan, is employed as an expert by an international buying house is also exempted from income tax.
Exemption introduced recently for ‘special technology zones’
Dividend income and long-term capital gains from investments in zone enterprises is exempt for 10 years starting from issuance of license by the authority to the zone enterprise.
Profit from the operations of the zones by zone developer as defined in special technology zone ordinance is exempt for 10 years starting from the date of signing of the development agreement.
Zone enterprise’s profit is exempt for 10 years. starting from the date of issuance of license by the authority.
Profit of special technology zones authority setup for infinite period.
Reduced withholding and minimum tax rates for the traders, wholesalers and retailers of specific sectors
Reduced tax withholding rate and minimum tax rate (on turnover) of 0.25% on receipts of dealers and sub-dealers of sugar, cement and edible oils also extended to wholesalers, retailers and distributers. The scope of goods / sectors covered under this concession expanded to also include fertilizer and fast-moving consumer goods and electronic (excluding mobile phones) subject to certain conditions.
The rate of advance tax collection by manufacturer or commercial importer of fertilizers reduced to 0.25% from 0.7%, if the distributor / dealer / wholesaler is active taxpayer for both income tax & sales tax.
Distributers, dealers, whole sellers and retailers of locally manufactured mobile phones shall no longer be required to act as withholding agent in terms of payment for sale of goods.
Tax liability of cotton ginners on their income shall not be more than 1% of their turnover from cotton lint, cotton seed, cotton seed oil and cotton seed cakes. The tax so payable shall be final tax in respect of their cotton ginning and oil milling activities only.
Taxation / Tax Rates of Small Companies
Activities of small companies are encouraged with a reduced income tax rate of 21%.
A small company has been defined to mean a company that: (a) is registered on or after 1 July 2005 under the Companies Ordinance, 1984 (b) has a paid-up capital plus undistributed reserves not exceeding PKR 50 million (c) has employees not exceeding 250 at any time during the year (d) has an annual turnover not exceeding PKR 250 million, and (e) is not formed by splitting up or the reconstitution of business already in existence.
Tax Credit on Charitable donations
Companies are allowed a tax credit equivalent to 20% of their taxable income in respect of donations to: (a) any board of education or university in Pakistan, established by or under federal or provincial law (b) any educational institution, hospital, or relief fund established or run in Pakistan by federal government, provincial government, or local government, and (c) any non-profit organization.
Companies were earlier allowed a straight deduction against taxable income (up to 20% of taxable income) in case of donations made to certain approved institutions. Donations to these charitable institutes earlier eligible for direct deduction from income has now been transposed into tax credit regime. As a result of that, overall upper limit for tax break for the donors, in respect of charitable donations, has been reduced.
Tax Credit on Foreign source Income / Foreign tax credit
Where a resident taxpayer derives foreign-source income on which foreign income tax is paid within two years from the year in which it is derived, the taxpayer is allowed a tax credit equal to the lower of (i) the foreign income tax paid or (ii) the Pakistan tax payable in respect of that income. However, foreign tax paid is not refundable.
Tax Exemptions | Tax Credits | Reduced Tax Rates | Minimum Tax | Taxation on Small company | Foreign Tax credits | Tax Credit on charitable donations | Financial Year 2021-2022 | Finance Act 2021 | FBR | Federal Board of Revenue | Updated Tax Exemptions |