Introduction
Taxation refers to the collection of taxes by the government from individuals, businesses, and investors. Taxes are a significant source of revenue for the government. The Federal Board of Revenue conducts taxation in Pakistan. The FBR is also responsible for devising tax policies and enforcing tax laws. Tax collection is important because of the following reasons:
- Taxation plays an essential role in a country’s economic development and stability.
- It enables the government to finance public services like healthcare, education, transportation, and security.
- Individuals and entities use taxes to redistribute wealth, promote economic equality, and regulate economic activities.
This blog will explore the different aspects of taxation in Pakistan, including its types, rates, regulations, and exemptions. If you want to gain knowledge regarding Pakistan’s taxes, you have landed at the right blog.
Types of Taxes in Pakistan
Pakistan has various taxes imposed on different economic activities carried out by businesses, investors, and individuals, like income, sales, excise, customs, etc. All these forms of taxation fall under direct and indirect taxation. We will explore what they are before moving on to direct and indirect taxation types.
- Direct Taxes: Direct tax is revenue the government generates by direct collection from the taxpayer. It includes:
- Income tax
- Wealth tax
- Capital gain tax
- Indirect Taxes: The government generates revenue through an intermediary in indirect taxes. For example, a shopkeeper tells you about the sales tax article, you pay it to the store owner, and then he delivers it to the authorities. Indirect taxes include:
- Sales Tax
- Custom Duty
- Excise Duty
In the next section of the blog, we will have an in-depth analysis of each direct and indirect tax, starting with the direct ones.
Direct Taxes In Pakistan
Income Tax in Pakistan
An income tax is a tax an individual, business, or corporation pays on their total income earned within a financial year. It is calculated based on the income slab and applicable tax rates. The government of Pakistan has set the income slab 2022–20232023 to be 2.5% of tax on salaried persons with a salary of up to Rs 1,00,000 per month and 35% for a person earning one million per month.
The income tax in Pakistan is imposed based on the Income Tax Ordinance 2001. The Income Tax Ordinance of Pakistan exposes various deductions and exemptions on taxable income, which include:
- Deduction of charitable donations
- Deduction of medical expenses
- Assumption of mortgage interest on the first house
- Deduction for contributions to recognized pension funds
These deductions and exemptions help individuals and businesses reduce their tax liability and encourage certain activities, such as charity and investment.
Now that we know what an income tax is, the question is: how can we file our income taxes? We will discuss this point in the following subsection of the blog.
How to file an income tax return in Pakistan
Taxpayers pay the tax on their taxable income earned during the financial year, which starts on July 1 and ends on June 30. They can file income tax returns online by logging in to the online portal The complete procedure for filing income tax with FBR includes the following:
- Log in to the online portal ‘IRIS.’
- If you are not registered, you must first sign up at the portal to register yourself.
- Once you get registered, you can file your income tax with FBR.
At the end of this subsection, we recommend you consult a tax professional and review tax laws and policies before filing your taxes with FBR to nullify any errors or mistakes in the filing procedure.
In the next section of the blog, we will go through the wealth tax in Pakistan.
Wealth tax in Pakistan
Revenue generated on the net wealth of an individual, business, or corporation is a wealth tax. The Wealth Tax Act of 1963 taxes the total assets obtained after subtracting liabilities.
Today, prominent real estate owners and stakeholders, including military personnel, resist charging a wealth tax. The tax was canceled in 2001. As a result, Pakistan is generating no revenue from the wealth tax.
That’s all about the wealth tax in Pakistan; now, we will discuss capital gain tax in the next section of the blog.
Capital gain tax in Pakistan:
Revenue generated on the profit gained through the sale of assets and properties by the government of Pakistan is called capital gain tax. Tax is imposed on the profit according to the Income Tax Ordinance 2001 regulations.
We categorize capital gain tax into short-term capital gains and long-term capital gains. In the following subsection of the blog, we will explore them briefly.
Short-term capital gain
The government imposes a short-term capital gain tax on the profit that the owner gains from holding an asset for less than one year.
Tax agencies add the accumulated profit to the annual income of the individual or company, and we deduct tax from the cumulative income as per the Income Tax Ordinance of Pakistan 2001.
Long-term capital gain
The government imposes a long-term capital gain tax on the profit that the owner gains from holding an asset for more than one year.
Long-term capital gains are taxed separately at a fixed rate, currently 15% for individuals and 7.5% for companies.
After knowing the long-term capital gains briefly, we will focus on the capital gain tax on the sale of property in Pakistan.
Houses and build-up properties
Tax agencies apply CGT (Capital Gains Tax) if the owner sells the property within four years of owning it; otherwise, they exempt the tax. The tax rates vary based on the holding period of the property.
- 15% for a holding period of less than one year
- 10% for a holding period of 1-2 years
- 7.5% for a holding period of 2-3 years
- 5% for a holding period of 3-4 years
Plots and Files
FBR applies CGT (capital gains tax) if the owner sells the plots and files within six years of owning them; otherwise, it exempts the tax. The tax rates vary based on the holding time of the property and the filing.
- 15% for a holding period of less than one year
- 12.5% for a holding period of 1-2 years
- 10% for a holding period of 2-3 years
- 7.5% for a holding period of 3-4 years
- 5% for a holding period of 4-5 years
- 2.5% for a holding period of 5-6 years
Apartments and Highrise Properties
FBR applies CGT (Capital Gains Tax) if the owner sells the apartments and highrise properties within six years of owning them; otherwise, it exempts the tax. The tax rates vary based on the holding time of the plot and file.
- 15% for a holding period of less than one year.
- 7.5% for a holding period of 1-2 years.
Upon concluding capital gain tax on the sale of property in Pakistan, we ended direct taxes in Pakistan. In the next section of the blog, we will discuss indirect taxes.
Indirect Taxes In Pakistan
Sales tax in Pakistan
Sales tax is a tax imposed on the sale of goods and services in Pakistan. Sales tax is deducted based on the Sales Tax Act by the FBR. Although sales tax is imposed at every step of the supply chain, from manufacturer to wholesaler to retailer, the burden is usually placed on the customers and consumers of goods and services.
Taxable goods and services
Goods are services on which sales tax is applied and are taxable. Taxable goods and services include electronics, automobiles, clothing, furniture, professional, restaurant, and telecommunications services. Tax rates vary based on the types of taxable goods and services.
Various goods and services either have comparatively less or no sales tax associated with them. Such goods and services include essential food, healthcare, and educational services.
As sales tax has been one of the significant sources of revenue generation for the Government of Pakistan, presently, in the time of economic downfall, sales tax is increased on various taxable goods and services from 17% to 25%, leading to an increase in inflation and the poverty rate in Pakistan.
Custom Duty
The tax imposed on imported and exported products is called customs duty. The purposes of customs duty include revenue generation, regulation of trade, and protection of domestic industries. FBR imposes the duty rate according to the Customs Act of 1969
Government authorities categorize customs duties into two types:
- Import duty: duty levied on goods imported to Pakistan from other countries
- Export duty: tax imposed on goods exported from Pakistan to other countries
The rate of duty depends on two main factors, which include:
- Type of good: Every good imported or exported is assigned a custom tariff code based on an international harmonized system to determine the duty rate.
- Country of origin: The duty imposed on products varies from country to country.
Customs Valuation and Procedures:
Customs valuation is the process of determining the customs value of imported goods to calculate customs duty. Authorities base the valuation on the transaction value of the goods.
Customs Procedures
- Submission of customs declaration: Importers must submit a Customs declaration and supporting documents, such as commercial invoices, packing lists, and bills of lading, to the Customs authorities. The statement should include accurate information about the goods, their value, and the applicable Customs tariff code.
- Inspection of customs declarations by Customs authorities: Customs officials may conduct checks, examinations, or verifications to ensure alignment of documents and invoices with Customs regulations and to evaluate custom duty.
- Customs clearance, assessment, and payment: Procedures for Customs clearance, review, and amount of Customs Duty vary depending on the nature of the goods, the mode of transport, and the Customs procedures.
Steps to follow for smooth Customs procedure
Importers and exporters should align with the imposed Customs procedures to facilitate smooth Customs clearance and avoid penalties or delays by
- providing accurate information
- maintaining necessary records
Excise Duty in Pakistan
Excise duty is a type of indirect tax imposed by the government of Pakistan on the production, sale, or import of specific goods that have adverse effects on the environment.
The primary purpose of excise duty includes:
- Generation of revenue for the government.
- Regulation of the consumption of certain goods.
FBR collects excise duty based on the Federal Excise Act of 2005.
Excisable Goods and Rates
Excise duty applies to a range of goods in Pakistan that adversely affect human health and the environment. Imposing excise on goods is intended to increase prices and reduce their sales. Some excisable interests include tobacco, petroleum, alcoholic beverages, cement, sugar, vehicles, and non-alcoholic drinks. The rates of excise duty vary depending on the type of goods.
Payment and Collection of Excise Duty in Pakistan
Excise Duty is paid and collected at various stages of the supply chain, depending on the nature of the goods. In some cases, the duty is paid at different levels of the supply chain by
- Manufacturer or Producer
- Importer
- Wholesaler or Retailer
In reality, duty is included in the price of the goods and finally passed on to the end consumer.
Procedure for Payment and Collection of Excise Duty
The FBR has prescribed procedures for the payment and collection of excise duty. Businesses engaged in the production, sale, or import of excisable goods are required to
- Register with the FBR’s online portal
- File the returns periodically
- Maintain proper records of transactions.
So, we propose businesses stay updated with the latest amendments and notifications issued by the FBR regarding excise duty to ensure accurate compliance.
Conclusion
Ultimately, we conclude that understanding the ins and outs of taxes in Pakistan is essential for individuals and businesses to fulfill their tax obligations and comply with the tax laws. The taxation system in Pakistan consists of various taxes like income tax, sales tax, federal excise duty, customs duty, wealth tax, and property tax. Each tax type has its own rules, rates, and compliance requirements.
We can understand the taxation system effectively by familiarizing ourselves with the tax regulations, seeking professional advice, and maintaining accurate records.
So, to improve the infrastructure and contribute to the development of our country, we must pay taxes, considering it our ultimate obligation toward Pakistan.