PakistanTax Obligations Detailed

Employers in Pakistan face various tax obligations, including income tax, social security contributions, and professional taxes. Understanding these requirements is crucial for compliant payroll processing.

Income Tax

• Employee Income Tax: Income tax is deducted from employee salaries monthly, with rates ranging from 0% to 35% for the 2025 tax year, based on income slabs. A 10% surcharge applies to taxable income exceeding PKR 10,000,000.
• Tax Slabs (Salaried Individuals - 2025):
  • PKR 0-600,000: Exempt
  • PKR 600,001 - 1,200,000: 5%
  • PKR 1,200,001 - 2,200,000: 15%
  • PKR 2,200,001 - 3,200,000: 25%
  • PKR 3,200,001 - 4,100,000: 30%
  • PKR 4,100,001 - 9,999,999: 35%
  • PKR 10,000,000 and above: 35% + 10% surcharge
• Withholding: Employers are responsible for withholding income tax from employees' salaries and remitting it to the tax authorities monthly. The surcharge, if applicable, is also withheld.
• Tax Year: The tax year runs from July 1st to June 30th.
• Filing: Employees must file annual tax returns by September 30th. Electronic filing is mandatory for income exceeding PKR 500,000.

Social Security

• Pension: Employers contribute 5% of the employee's salary, while employees contribute 1%, towards the Employees' Old-Age Benefits Institution (EOBI). Monthly payments are mandatory.
• Provincial Social Security Funds: Employers may also be required to contribute to provincial social security funds depending on location and industry.

Professional Tax

• Rates: Professional tax rates vary based on the nature of the business, paid-up capital for companies, and the number of employees. Specific rates are defined by provincial tax laws.
• Payment: Professional tax is usually paid annually.

Additional Employer Obligations

• Minimum Wage: The minimum wage is PKR 17,500 per month as of January 1st, 2025.
• Payroll Cycle: Payroll can be processed weekly, bi-monthly, or monthly.
• Payslips: Providing payslips to employees is mandatory.

Note: This information is current as of February 5, 2025, and may be subject to change. Consulting with a tax advisor is recommended for the most up-to-date and specific guidance.

Employee Tax Deductions in Pakistan for 2025

An overview of the tax deductions applicable to salaried employees in Pakistan for the fiscal year 2024-2025.

Tax Slabs and Rates

• Taxable Income: The tax rates are progressive, meaning higher earners fall into higher tax brackets. As of 2025, the following slabs and rates are applicable:

  • PKR 0 to 600,000: Exempt
  • PKR 600,001 to 1,200,000: 5%
  • PKR 1,200,001 to 2,200,000: 15%
  • PKR 2,200,001 to 3,200,000: 25%
  • PKR 3,200,001 to 4,100,000: 30%
  • PKR 4,100,001 to 9,999,999: 35%
  • PKR 10,000,000 and above: 35% plus a 10% surcharge on the tax amount.

Allowances and Exemptions

• Medical Allowance: Reimbursement of actual medical expenses is tax-exempt. If reimbursement isn't provided, a medical allowance up to 10% of the basic salary is exempt.
• Zakat: Zakat payments made under the Zakat and Usher Ordinance are deductible.
• Donations: Donations to approved non-profit organizations are eligible for tax credits. The credit amount is limited to either the donation amount or 30% of taxable income, whichever is lower. Donations made to associates are limited to 15%.

Withholding Tax

• Salary Deduction: Employers are responsible for deducting tax directly from employee salaries according to the applicable tax slabs.
• Other Income: Withholding tax (WHT) rates vary for other income sources like goods, services, or contracts, depending on the individual's filer status (active taxpayer or not).

Tax Year and Residency

• Tax Year: The tax year in Pakistan is from July 1st to June 30th.
• Residency: Pakistan taxes residents on their worldwide income. Non-residents are taxed on Pakistan-sourced income. Residency is determined by spending more than 183 days in Pakistan within a calendar year.

Additional Information

• The provided information pertains to the tax year 2024-2025 and is current as of February 5, 2025. Tax laws and regulations are subject to change. It's essential to stay updated with the latest tax regulations published by the Federal Board of Revenue (FBR). Consulting with a tax advisor can provide personalized guidance.

In Pakistan, the Goods and Services Tax (GST), locally known as Sales Tax, is a consumption tax levied on most goods and services.

Sales Tax on Goods

• Standard Rate: 18% (As of February 2025). This rate applies to most goods unless specifically exempt. An additional 4% tax is levied on supplies to unregistered businesses or individuals. This additional tax may be exempt under certain conditions determined by the Federal Government.
• Exempt Goods: Certain essential goods are exempt, including some basic foodstuffs, agricultural supplies, pharmaceuticals, books, journals, and medical supplies. Further exemptions are possible through government notifications.

Sales Tax on Services

• Rates: Vary by province and service type, generally ranging from 13% to 16% (as of February 2025).
  • 16%: Commonly applied in Punjab and Islamabad for most services.
  • 15%: Prevalent in Khyber Pakhtunkhwa and Balochistan.
  • 13%: The rate often applied in Sindh.
• Telecommunications Services: Subject to 17% sales tax under federal law. However, provincial rates may apply, reaching up to 19.5% outside Islamabad.
• Specific Rates: Specialized services like banking, construction, advertising, and consulting may have specific rates within the general range.

Registration

• Threshold: Businesses must register for Sales Tax once their annual turnover exceeds PKR 8 million.
• Voluntary Registration: Businesses operating below the threshold can register voluntarily with provincial tax offices.
• Mandatory Registration: Regardless of turnover, businesses involved in import or export activities must register.
• Non-Resident Businesses: Generally not required to register unless supplying digital/online services to Pakistani consumers.

Filing and Payment

• Returns: Filed monthly by the 18th of the following month.
• Payments: Due by the 15th of the following month.
• Annual Return: Required by September 30th of the following year.
• Electronic Filing: Returns are filed online through the FBR's efile portal.

E-invoicing

• The Federal Board of Revenue (FBR) is implementing e-invoicing regulations.
• Tier-1 retailers, as classified by the FBR, have specific e-invoicing and sales reporting requirements.
• B2B e-invoicing is expected to be implemented through a centralized platform requiring JSON file submissions. Registered businesses will need to integrate their accounting systems with licensed integrators approved by the FBR.
• B2C transactions will require fiscal registers for automated daily reporting to the FBR, with remote access available for tax authorities. Fast Moving Consumer Goods companies are among the first businesses required to adopt fiscal registers.

Penalties

• Late Filing: PKR 10,000 penalty for late submission of sales tax returns for goods.
• Late Payment: 12% surcharge on late payment of sales tax for goods. Penalties for services vary by province.

Additional Information

• Input Tax: Sales tax paid on purchases, including imports, can be credited against output tax (sales tax collected on sales).
• Further taxes: A further tax of 3% (with certain exceptions) applies to supplies to unregistered persons. A 1% tax may also apply when selling goods to unregistered consumers.

Disclaimer: This information is for general guidance only, is valid as of February 5, 2025, and may be subject to change. Consult with a tax professional for specific advice.

Pakistan offers a range of tax incentives to promote investment and specific sectors. As of today, February 5, 2025, these incentives include various tax credits, exemptions, and reduced rates. Note that these details might change, and staying updated with the latest regulations is crucial.

Incentives for Specific Sectors

• Information Technology (IT) and IT-Enabled Services (ITeS):
  • 100% tax credit on income from IT/ITeS exports (provided 80% of export proceeds are repatriated through normal banking channels).
  • Tax breaks for Pakistan Software Export Board (PSEB)-registered startups for three years.
  • 100% foreign ownership permitted.
  • 100% repatriation of profits allowed for foreign investors.
  • Exemption of sales tax on IT services exports in the Islamabad Capital Territory.
  • 35% of export earnings retention in foreign currency for overseas payments.
  • Provision of IT-enabled office space in Software Technology Parks (STPs).
• Renewable Energy:
  • Exemption from customs duty and sales tax on import of machinery, equipment, and spares.
  • Exemption from income tax on profits and gains for projects related to solar, wind, micro-hydel, bio-energy, ocean, waste-to-waste, and hydrogen cell power generation.
• Coal Mining:
  • Exemption from customs duty and sales tax on importing machinery, equipment, materials, spares, and vehicles.
  • Income tax exemption on profits and gains.
• Energy Projects:
  • 90% first-year depreciation allowance on the cost of plant, machinery, and equipment.
  • Private sector power projects are exempt from income tax.
  • Dividends to shareholders of private sector power projects taxed at reduced rates (7.5% initially, then 10%).
• Oil Exploration and Production:
  • Concessionary rate of customs duty and sales tax exemption on machinery, equipment, chemicals, consumables, specialized vehicles, and helicopters.
• Construction:
  • Fixed tax regime with reduced rates.
  • Relaxation of withholding tax provisions (except for steel and cement).
  • Capital gains tax exemptions for family house sales.
  • Reduced capital gains tax holding period for constructed property.
• Auto Sector:
  • Incentives under the Automotive Development Policy (ADP) vary based on specific provisions.

General Tax Incentives

• Tax Credits:
  • 100% tax credit on income from IT/ITeS exports (subject to conditions).
  • Tax credits for donations to approved non-profit organizations.
• Exemptions:
  • Various exemptions for specific sectors like IT, renewable energy, and coal mining.
  • Tax exemption for venture capital companies and funds until June 30, 2025.
  • Tax exemption for specific charitable organizations.
• Reduced Rates:
  • Reduced corporate tax rate of 20% for small companies.
  • Reduced withholding tax rates on specific payments.

Application Procedures

Specific application procedures vary based on the incentive and sector. Detailed information is usually available from relevant government bodies like the Federal Board of Revenue (FBR), Board of Investment, or sectoral regulatory authorities. Consult the official notifications, rules, and legal texts for accurate and up-to-date application requirements.

Other Relevant Information

• Foreign Tax Relief: Resident entities can claim credit for foreign taxes paid on foreign-source income.
• Personal Deductions/Credits: Individuals can avail deductions for Zakat, donations, and specific expenses like home loan interest and children's tuition fees.
• Special Economic Zones: These zones offer additional incentives like tax holidays and exemptions.

This overview provides a summary of prevalent tax incentives in Pakistan. Always refer to the latest official publications and consult with tax professionals for specific guidance.