TX-PKN Taxation (Pakistan)

A. The Pakistan tax system and its administration

Taxes raise revenue for government, redistribute income, influence behaviour (for example by taxing harmful goods or encouraging investment) and help to manage the economy. A direct tax, such as income tax, is charged on the person who bears it. An indirect tax, such as sales tax, is collected by a business from customers and paid to the tax authority, and the burden falls on the final consumer. In Pakistan the Federal Board of Revenue (FBR) administers federal taxes, including income tax and federal sales tax. The main sources of law are the Income Tax Ordinance, 2001 (the Ordinance), the Sales Tax Act, the Finance Acts passed each year, rules and notifications, FBR circulars, and the decisions of the courts. A circular explains how the FBR will apply the law, but it does not change the law, so a taxpayer can challenge one that goes beyond it. Agreements for the avoidance of double taxation that Pakistan has signed with other countries can override local tax law.

Tax avoidance is arranging affairs legally to reduce tax, and tax evasion is illegal, usually through hiding income or giving false information. Accountants must act in an ethical and professional way, and must not help to evade tax. If a person cannot satisfactorily explain where a credit in their books, the funds for expenditure, an investment or a valuable article came from, the amount can be treated as income. Agricultural income and foreign remittances can explain unexplained assets only to the extent that they are shown to be the source.

Pakistan uses a system of self-assessment. Taxpayers calculate their own tax and file a return, which is treated as an assessment, with automatic processing. Individuals, associations of persons (AOPs) and companies have different filing requirements, and some taxpayers may also need to file a wealth statement or a statement of foreign income and assets. A taxpayer can revise a return to correct errors. The Commissioner can enquire into a return and amend the assessment within time limits. Where a person has not filed a return, the Commissioner can issue a notice and make a best judgement assessment. Taxpayers must keep records for the period required.

Tax is paid through several routes. Advance tax is paid in instalments during the year based on the taxpayer's previous assessment or an estimate. Withholding (deduction at source) requires specified payers to deduct tax from certain payments such as salary, contracts, rent and dividends and pay it to the government. Depending on the payment, the withheld tax can be the final tax, a credit against the tax liability, or the minimum tax. Withholding rates are higher for persons who are not on the Active Taxpayers' List (ATL). A refund of tax can be claimed where tax paid is more than the liability, and additional payment is due to a taxpayer if the refund is delayed.

If a taxpayer disagrees with an assessment, the main route is an appeal to the Commissioner (Appeals) and then to the Appellate Tribunal. Alternative dispute resolution is also available. The tax authority may audit a taxpayer's affairs, and the Board can select taxpayers for audit. Default surcharge is charged on tax paid late, and penalties apply for failures such as not filing returns, not keeping records, concealing income, making false statements and not paying tax.

Key terms

• Self-assessment: A system in which taxpayers calculate their own liability and file a return that is treated as an assessment.
• Active Taxpayers' List (ATL): The list of taxpayers who have filed returns, for whom lower withholding rates apply.
• Withholding agent: A person required to deduct tax from a payment and pay it to the government.
• Best judgement assessment: An assessment made by the Commissioner on the information available when a return has not been filed.

Study tip: Learn the three roles of withheld tax: final tax, credit against the liability, or minimum tax. Questions often ask which one applies.

Practice questions for section A

B. Income tax liabilities of individuals and unincorporated bodies

Scope. A resident individual is taxed on Pakistan-source and foreign-source income, and a non-resident individual only on Pakistan-source income. An individual is resident if present in Pakistan for at least 183 days in the tax year, or in some other cases set out in the Ordinance. An association of persons (AOP) is taxed separately from its members, and a share of profit that a member receives from an AOP that has paid tax is exempt in the member's hands. The tax year is normally the 12 months ending on 30 June, though a special or transitional tax year may apply. Income is classified under five heads: salary, income from property, income from business, capital gains and income from other sources.

Salary. Income from employment is assessed on the receipt basis, which means it is taxed when it is received or treated as received. It includes salary, bonuses, allowances, benefits and perquisites, which are valued at their fair market value, unless an exemption applies. No expenses can be deducted from salary. Termination payments and salary in arrears have special options, and gratuity, pension and provident fund payments have their own treatment, depending on the fund and the rules.

Business income is computed from accounting profit, adjusted for tax. The general rule is that expenditure is deductible if incurred wholly and exclusively for the business and it is revenue in nature, and some expenses are expressly not allowable. Capital expenditure is not deductible but may qualify for depreciation or amortisation. Capital allowances are depreciation on the tax written down value (WDV) of an asset at the rates in the tax tables (buildings 10 percent, furniture and fittings, plant and machinery and motor vehicles 15 percent, computer hardware 30 percent), and an initial allowance of 25 percent of cost on eligible plant and machinery in the year of purchase. The WDV for depreciation in the year of purchase is the cost less the initial allowance. Pre-commencement expenditure is amortised at 20 percent a year. Bad debts are deductible only if conditions are met, and recoveries of amounts previously allowed are taxable. Business losses can be set against other heads of income, apart from salary and property income, in the same year, and unabsorbed business losses can be carried forward.

Property income. Rent from property is taxed under income from property, with permitted deductions. Other income that does not fall under the other heads is taxed as income from other sources, and it includes dividends and some profit on debt, and certain gifts and receipts that the Ordinance treats as income.

Computation. Total income is the sum of the income under the heads. Allowances such as zakat and contributions to some funds are deducted to reach taxable income. Salaried individuals whose salary income exceeds 75 percent of their taxable income use the salaried slab rates. Other individuals and AOPs use the non-salaried slab rates. A surcharge is added to the tax at the rate in the tax table, 9 percent for salaried persons and 10 percent for non-salaried persons. Credits are then deducted, for example for tax withheld, charitable donations and foreign tax paid on foreign income. Minimum tax can apply, based on turnover, and exemptions and reliefs in the Second Schedule can reduce the liability, for example for agricultural income, some foreign-source income and certain pensions.

Worked figures from ACCA's 2026 to 2027 tax tables

Salaried individual: taxable income of Rs. 2,500,000 gives tax of Rs. 116,000 + 23% x (2,500,000 - 2,200,000) = Rs. 185,000. For Rs. 4,500,000 the tax is Rs. 616,000 + 35% x (4,500,000 - 4,100,000) = Rs. 756,000.

Non-salaried individual or AOP: taxable income of Rs. 2,000,000 gives tax of Rs. 170,000 + 30% x (2,000,000 - 1,600,000) = Rs. 290,000. For Rs. 1,000,000 the tax is 15% x (1,000,000 - 600,000) = Rs. 60,000.

Capital allowances: plant and machinery costing Rs. 2,000,000 qualifies for an initial allowance of 25% = Rs. 500,000, leaving a WDV of Rs. 1,500,000. Depreciation at 15% = Rs. 225,000, so the total allowance in the first year is Rs. 725,000 and the closing WDV is Rs. 1,275,000.

Pension: taxable pension up to Rs. 10,000,000 is taxed at 0%. For Rs. 12,000,000 the tax is 5% x 2,000,000 = Rs. 100,000.

Key terms

• Receipt basis: Salary is taxed when it is received or treated as received.
• Tax written down value: Cost of an asset less the depreciation and initial allowance already claimed for tax.
• Association of persons: A group of persons carrying on business that is taxed separately from its members.
• Surcharge: An extra percentage added to income tax at the rate in the tax tables.

Study tip: In computations, set out the heads of income first, then total income, then taxable income. It keeps your tax calculation clean and earns method marks.

Practice questions for section B

C. Income tax liabilities of companies

A company is liable to tax separately from its shareholders. A company is resident in Pakistan if it is incorporated in Pakistan or, in some cases, if its control and management are exercised in Pakistan. The rules for tax year, tax accounting, capital against revenue, income heads, associates, disposals and Pakistan-source income are broadly the same as for individuals and AOPs. Bonus shares issued by a company are treated as income of shareholders, and tax is paid on them, under the relevant provision.

Business income is computed in the same way as for individuals. Companies can claim depreciation, initial allowance, amortisation of intangibles, pre-commencement expenditure and relief for losses. Additional rules apply to companies, such as the restriction on the deduction for profit on debt payable to associated enterprises, thin capitalisation rules for foreign-controlled resident companies and branches, and group taxation and group relief where the conditions are met.

The corporate tax rate is 20 percent for a small company and 29 percent for any other company that is not a banking company. An alternative corporate tax at 17 percent is calculated on accounting income as adjusted under the Ordinance. If it is higher than the normal tax, the higher amount is payable. Small and medium enterprises (SMEs) have special rates under the normal law regime (7.5 percent for Category-1 and 15 percent for Category-2) and under the final tax regime (0.25 percent for Category-1 and 0.5 percent for Category-2). Super tax applies to high-earning persons, with rates rising with income as shown in the tax table. Dividends paid by a company are subject to withholding tax at the rates in the table, which depend on the type of company paying.

Income from property and from other sources is computed in the same way as for individuals, and the comprehensive computation sets out total income by head and then the tax. Tax credits, such as withheld tax, are deducted from the tax payable to find the amount still to be paid.

Worked figures from ACCA's 2026 to 2027 tax tables

Taxable income of Rs. 10,000,000: an ordinary company pays 29% = Rs. 2,900,000, and a small company pays 20% = Rs. 2,000,000.

Alternative corporate tax: accounting income of Rs. 30,000,000 at 17% gives Rs. 5,100,000. If normal tax is Rs. 4,000,000, the alternative tax is higher, so Rs. 5,100,000 is payable.

Key terms

• Small company: A company that meets the definition in the Ordinance and pays the lower corporate rate.
• Alternative corporate tax: A tax on accounting income that applies if it is higher than the normal tax.
• Thin capitalisation: Limits on the deduction of interest where a foreign-controlled company has high debt compared with equity.

Study tip: Always check which company rate applies first. Questions often give small company status in the scenario.

Practice questions for section C

D. Capital gains

A capital gain arises when a capital asset is disposed of for more than its cost. The scope of the tax covers gains on securities and on immovable property, among other assets. The gain is the consideration received less the cost of the asset and the costs of disposal, and a loss arises when the result is negative. Capital losses can generally be set only against capital gains, and not against other heads of income.

The tax rates in ACCA's tables depend on what is sold, when it was acquired and how long it was held. For securities acquired before 1 July 2013 the rate is 0 percent, for those acquired from 1 July 2013 to 30 June 2022 it is 12.5 percent, and for those acquired from 1 July 2024 the rate is 15 percent for persons on the ATL, and for those not on the ATL it is the individual slab rates subject to a minimum of 15 percent for individuals and AOPs, and 20 percent or 29 percent for small and other companies. For immovable property acquired on or before 30 June 2024, the rate falls as the holding period gets longer, and differs for open plots, constructed property and flats. For property acquired on or after 1 July 2024, the rate is 15 percent for persons on the ATL, with higher rates for those who are not. Always use the table that ACCA provides in the exam.

Exemptions and reliefs exist for some disposals, such as certain transfers where no gain or loss is recognised for tax, and these are set out in the Ordinance. The use of such reliefs can reduce the tax payable, but you must check the conditions.

Worked figure

A person on the ATL sells shares acquired after 1 July 2024 for Rs. 1,500,000. They cost Rs. 1,000,000, and disposal costs were Rs. 20,000. The gain is Rs. 480,000 and the tax at 15% is Rs. 72,000.

Key terms

• Capital gain: The excess of the consideration received on disposal over the cost of an asset.
• Holding period: The time between acquiring and disposing of an asset, which affects the rate for property.

Study tip: The tax table does the heavy lifting here. Identify the asset type and the acquisition date first, then read the rate off the table.

Practice questions for section D

E. Sales tax

Sales tax is an indirect tax on the supply of goods and services. A registered person charges output tax on taxable supplies and can deduct input tax paid on purchases used for the business, and pays the difference to the tax authority. If input tax is more than output tax, the excess is generally carried forward, and refunds are available only in the cases that the law permits. Registration is required when a person's supplies pass the threshold in the law or carries on a taxable activity that requires it, and a person who stops making taxable supplies can apply to be de-registered. Sales tax on goods is collected at federal level and on services by the provincial revenue authorities.

The tax due on a supply is the value of the supply multiplied by the rate. If a price already includes sales tax, the tax is the price multiplied by the rate divided by (100 plus the rate). The sales tax liability for a period is output tax less input tax, subject to rules that deny input tax on some items, for example where the purchase is not for business use or the documentation is missing. Sales tax returns are filed monthly, and the tax is paid by the due date. Late filing and payment can lead to default surcharge and penalties, and a taxpayer who disagrees with an assessment can make representations and appeal.

The rates, thresholds and special regimes are given in the exam question and are changed by Finance Acts, so use the figures in the question. Do not rely on a rate you remember.

Worked figures (rate of 18 percent assumed for illustration)

A registered person has output tax of Rs. 360,000 and input tax of Rs. 270,000, so the sales tax payable is Rs. 90,000.

A tax-inclusive price of Rs. 11,800 includes sales tax of 18/118 x 11,800 = Rs. 1,800, and the price without tax is Rs. 10,000.

Key terms

• Output tax: Sales tax charged on a taxable supply made by the registered person.
• Input tax: Sales tax paid on business purchases that the registered person can deduct.
• Tax fraction: Rate / (100 + rate), used to find the tax in a price that includes tax.

Study tip: Take the rate from the question. For tax-inclusive amounts, use the tax fraction, not the rate.

Practice questions for section E

Tables. Withholding tax rates from the tax tables

This section pulls together rates that the exam provides in its tax tables. The rates are for persons on the ATL, and they double for persons who are not on it. Sale of goods: 5 percent where payment is to a company and 5.5 percent where it is to another taxpayer. Services not specifically listed: 15 percent. Transport, software development, tracking and engineering services: 6 percent. IT and IT-enabled services: 4 percent. Advertising by media: 1.5 percent. Contracts (other than by a sportsperson): 7.5 percent to a company and 8 percent to others. Rent paid to a company: 15 percent. Rent paid to an individual or an AOP: 0 percent up to Rs. 300,000, 5 percent of the excess over Rs. 300,000 up to Rs. 600,000, Rs. 15,000 plus 10 percent of the excess over Rs. 600,000 up to Rs. 2,000,000, and Rs. 155,000 plus 25 percent of the excess over Rs. 2,000,000.

Whether the withholding tax is the final tax, a credit or a minimum tax depends on the type of payment, and you must say which in a computation. Exports of goods and services attract withholding at 11 percent, and this rate is the same whether or not the exporter is on the ATL. Dividends are subject to withholding tax at 15 percent in the general case, 7.5 percent when paid by independent power producers, and 25 percent when paid by companies that had not paid tax on their income because of exemption, carried forward loss or credits.

Withholding agents must deduct the right amount and pay it to the government. Failing to deduct, or deducting and not paying, brings consequences, including liability for the tax and default surcharge and penalties.

Worked figures

Services not specifically listed, Rs. 1,000,000 paid to a person on the ATL: 15% = Rs. 150,000. If the payee is not on the ATL, the rate doubles to 30%, which gives Rs. 300,000.

Rent of Rs. 1,000,000 paid to an individual: Rs. 15,000 + 10% x (1,000,000 - 600,000) = Rs. 55,000.

Key terms

• Withholding tax: Tax deducted at source by the payer of certain payments.
• Final tax: A withholding tax that fully settles the tax on that income.

Study tip: For withholding questions, first check whether the payee is on the ATL. If not, double the rate.

Practice questions for section Tables