A resident company is taxed on its worldwide income. Non-resident companies operating in Pakistan through a branch are taxed on their Pakistan-source income attributable to the branch in Pakistan at tax rates applicable to a company under Income Tax Ordinance, 2001.
The federal corporate tax rates on taxable income (for tax year 2022) are as follows:
|COMPANY TYPE||TAX RATE (%)|
|Public company other than a banking company||29%|
|Any other company||29%|
The future tax rates applicable for ‘companies’ and ‘small companies’ will be as follows:
|TAX YEAR||COMPANY RATE (%)||SMALL COMPANY RATE (%)|
|2023 & Onward||29||20|
Public Company Definition:
The term ‘public company’ implies a company listed on any stock exchange in Pakistan or one in which not less than 50% of the shares are held by the federal government or a public trust.
100% Increase in withholding tax rates
The rate of WHT for certain transactions is enhanced by 100% for persons not appearing on the ATL.
Taxation of a ‘Women Enterprise’ – Introduced in Finance Act 2021
A new concept of ‘women enterprise’ has been introduced in Finance Act 2021. ‘women enterprise’ means a startup established on or after July 1, 2021 by women. A company whose 100% shareholding is held or owned by women shall be subject to tax at a reduced rate of 25 per cent on its profit and gains derived from business chargeable to tax under the head “Income from Business”.
The benefit of this clause, however, will not be available to a women enterprise type of business that is formed by the transfer or reconstitution or reconstruction or splitting up of an existing business.
Taxation of Small & Medium sized manufacturing enterprise [‘SME’] – (Other than small company)
Small and Medium Enterprise (SME) is defined as a person who is engaged in manufacturing and his business turnover in a tax year does not exceed Rs 250 Million. In case, annual business turnover exceeds Rs 250 Million, it shall cease to be an SME for such tax year and onwards.
SME needs to register with following departments:
SME is required to register with the FBR on the IRIS web portal or Small and Medium Enterprises Development Authority (SMEDA) on its SME registration portal. A company covered by the definition of SME will not qualify as a ‘small company’.
Tax rates under Normal Tax Regime: For the purpose of taxation, the SMEs are classified into the following two categories and tax on taxable income is required to be computed at the rates given below:
Tax rates of small and medium enterprise type of business
Category 1: 7.5% of the taxable income, where annual business turnover does not exceed PKR 100 million;
Category 2: 15%% of the taxable income, where annual business turnover exceeds PKR 100 million but does not increase 250 million.
When SME can opt to be taxed under ‘Final Tax Regime’ ?
SMEs can also opt to be taxed under the FTR. The said option is required to be exercised at the time of return filing and the same will be irrevocable for three tax years. The SMEs who opts to be taxed under FTR shall not be subject to tax audit under sections 177 and 214C. The category-wise rate of tax under FTR is given as under:
Tax Rates under Final Tax Regime of Small and medium enterprise (SME)
Category 1: 0.25% of the gross turnover, where annual business turnover does not exceed PKR 100 million;
Category 2: 0.5% of the gross turnover, where annual business turnover exceeds PKR 100 million but does not increase 250 million.
IMPORTANT: Minimum tax on turnover shall not apply on SME.
Taxation of a permanent establishment (PE) in Pakistan
The following principles shall apply in computing taxable income of a PE:
It is a distinct and separate entity dealing independently with the non-resident of which it is a PE.
In addition to business expenditure, executive and administrative expenditure, whether incurred in Pakistan or elsewhere, will be allowed as deductions.
Head office expenditure, including rent, salaries, travelling, and any other expenditure that may be prescribed, shall be allowed as a deduction in proportion to the turnover of the PE in the same proportion as the non-resident’s total head office expenditure bears to its worldwide turnover.
Royalties, compensation for services (including management services), and interest on loans (except in banking business) payable or receivable to or from a PE’s head office shall be considered in computing taxable income of the PE.
No deduction will be allowed for any interest paid on loans acquired by a non-resident to finance the operations of a PE (or for the insurance premium in respect of such loans).
Income from sale of goods (in the same state), rendering of services, and execution of contracts derived by a PE of a non-resident person is subject to ‘minimum tax’ of the gross consideration. Further, in line with the regime applicable for resident service providers, a reduced tax/WHT rate of 3% is also applicable with respect to certain specified services rendered by a PE of a non-resident person. The services are as follows:
Transport services. Air cargo services. Courier services. Manpower 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. Car rental services. Building maintenance services. Engineering services. Services rendered by Pakistan Stock Exchange Limited and Pakistan Mercantile Exchange Limited. Inspection, certification, testing, and training services. Oil field services.
Minimum tax provisions on a turnover basis are now applicable on PEs of non-residents. The general rate of tax on turnover is 1.25% for tax year 2022 (TY 2021: 1.25%).
Taxation of certain contracts executed by non-resident persons
Income derived by non-resident persons/their affiliates from turnkey contracts that are part of an overall arrangement for supply of goods, installation, construction, assembly, commission, guarantee, and supervisory activities, including offshore supply of goods (i.e. cohesive business operation), constitutes Pakistan-source income.
‘Cohesive business operations’, includes:
an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees, or supervisory activities, and all or principal activities are undertaken or performed either by the person or the associates of the person, and
supply of goods include the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.
In case of payment against transactions that constitutes part of an overall arrangement of a cohesive business operation, the Commissioner (on application made by the payer) may allow the person to make payment after deduction of tax equal to 20% of tax chargeable on such payment, which is normally 7%. So the effective rate of withholding in the instant case shall be 1.4%. This rate is 1% in case of offshore supply contract for an IPP located in Azad Jammu & Kashmir subject to certain conditions.
What is Minimum tax on turnover?
Where the tax payable by a company is less than 1.25% of the turnover, the company is required to pay a minimum tax equivalent to 1.25% of the turnover. In certain cases/sectors, such turnover tax is payable at rates less than 1.25% (ranging from 0.25% to 0.75 % of turnover).
Tax paid in excess of normal tax liability in the instant case can carry forward for adjustment against tax liability of a subsequent tax year. However, such tax can only be adjusted against tax liability of the five tax years immediately succeeding the tax year for which the amount was paid.
What are Transaction based minimum taxes?
Certain withholding taxes, applicable on payments made to residents and non-residents considers as minimum tax. while determining their corporate tax liability on net-income basis. These transactions inter-alia include sale of goods (unless by a company being a manufacturer of such goods or by a company listed on a Pakistani stock exchange), rendering of services, and execution of contracts (unless payment received by a company listed on Pakistani stock exchange).
What is Alternate Corporate Tax (ACT)?
Under the ACT, the minimum tax liability of a company is the higher of 17% of accounting income or the corporate tax liability determined under the Ordinance, including minimum tax on turnover. Applicable for all companies except insurance companies, companies engaged in exploration and production of petroleum, banking companies, and companies enjoying a reduced rate of tax.
Exempt incomes, capital gain on disposal of specified listed securities, income entitled to 100% tax credit on account of equity investment, and income of non-profit organizations, trusts, and welfare institutions are not subject to levy of ACT.
What is Super tax?
Super tax is leviable only upon banking companies at 4% for tax year 2021 & onwards.
Taxation of Builders and Developers:
The key benefits available to builders and developers who fulfil certain conditions given in section 100D:
A scheduler based fixed tax regime for builders and developers, available for eligible projects being either new or existing incomplete projects.
FBR will not require any explanation regarding the nature and source of capital investments in new projects by investors and to the first purchasers of buildings, including units therein, in new and existing incomplete projects and for plot purchasers.
Facility for builders and developers to incorporate their profits and gains in books of accounts up to ten times the amount of fixed tax paid under the regime on eligible projects.
Profit and gains accruing from such projects in excess of ten times of tax paid can be incorporated by paying tax at a rate of 20% on such profits and gains that are in excess of the said limit.
Exemption from tax on dividend distributed by corporate builder or developer out of the profits and gains of eligible projects, with specific exemption from tax withholding on such distribution.
Builders and developers absolved from WHT under section 153 of the ordinance on purchase of materials (except steel and cement) and services (plumbing, electrification, shuttering, and other similar and allied services) provided by non-corporate service providers.
These benefits available to a new project or an incomplete existing project applying for the scheme / fulfilling certain conditions by June 30, 2021 and if the project completes by September 30, 2023.
Taxation of Real estate investment trust [‘REIT’]
Presently, exemption for profit and gains on sale of immovable property to a Developmental REIT Scheme and Rental REIT Scheme is available till June 30, 2023. Now, this exemption extends to profit and gains on sale of immovable property to other REIT schemes till June 30, 2023 as well. This was previously available till June 30, 2015.
Corporate Tax Rates | Resident Company | Non Resident Company | Permanent Establishment Company | Women Enterprise | Taxation of Builders & Developers | Real Estate Investment Trust | Taxation of Corporate Sector | FBR | Federal Board of Revenue |