Pakistan Tax & Business Guide - Deloitte

Basic facts
Population 159.6m Inflation 7.9% (2006)*
Main languages English, Urdu, Punjabi GDP per head US$810*
Currency Pakistani rupee (PKR) GDP growth 6.2% (2006)*
Economic communities WTO
GDP sources 20.5% agriculture, 26.7% industry, 52.8% services
*Economist Intelligence Unit estimates.
Political environment

The prime minister heads the government, but the president is the de facto head of the executive and leads the National Security Council, which comprises military chiefs, cabinet members and the leader of the opposition.

General Pervez Musharraf, the president and chief of army staff, faces a presidential election in 2007; a parliamentary election will take place in 2008.
Foreign trade and investment
Exports US$19.1bn (2006)* Imports US$27.4bn (2006)*
*Economist Intelligence Unit estimates.

Leading exports: Textiles, rice, leather products, carpets, surgical equipment and sports goods.

Leading export markets: The US, the UAE, the UK, China (including Hong Kong) and Germany.

Foreign investors may invest up to 100% equity in all industrial sectors without prior permission, with a few exceptions. New investment in consumer alcohol manufacture is banned.
Business and financing
Business forms Public and private limited liability companies

There are no restrictions on the transfer of private company shares, but only public companies may sell shares on the stockmarket. The process of formation of a company is straightforward, and approval for dividend remittance is automatic based on an entitlement certificate obtained at the time of formation of the company. Branches are subject to many restrictions and, for example, may not bid directly for government tenders. Branches may be set up only in case of a definite contract awarded to a foreign company and is usually limited to five years.
Labour environment
Unemployment rate 4.1% (2006)* Minimum wage PKR 4,000 (monthly)
*Economist Intelligence Unit estimate.

The 2006Ò07 budget increased the private-sector monthly minimum wage from PKR 3,000 to PKR 4,000. The government puts union members at approximately 10% of the industrial labour force and 3% of the total estimated workforce.

Under the social security scheme, employers with more than ten workers pay 7% of wages to cover the risks of sickness, maternity and injury in the course of employment. Employers must also contribute 5% of pre-tax profit to the Workers Profit Participation Fund. For the Workers Welfare Fund, the contribution is as follows:

* Where a return of income is to be filed, 2% of the higher of pre-tax accounting profit or as declared in the return of income; and
* Where a statement under section 115(4) of the Income Tax Ordinance, 2001 is to be filed, 2% of the higher of pre-tax accounting profits or 4% of the total receipts as declared in the said statement.

Industrial firms must pay one month of basic salary as a bonus to employees when there is a profit.

There are no restrictions on employing foreigners, and foreign firms may appoint foreign citizens as chief executives. Employees are protected against unjust dismissal, but no similar requirement applies for white-collar employees, whose employment is regulated only by the employment contract.
Taxation
Corporate tax
Main rate 35% (public companies), 37% (private companies)

Resident companies are taxed on worldwide income; non-resident companies are taxed only on Pakistani-source income. A company is resident if incorporated or formed under Pakistani law, or if management and control of the company are exercised wholly in Pakistan at any time during the year. The corporate tax rate is 35% for public companies, 37% for private companies and 38% for banking companies. A minimum tax of 0.5% of turnover also applies. Small companies are taxed at a reduced rate of 20%. A small company is a company registered on or after July 1st 2005, under the Companies Ordinance, 1984, which has paid-up capital plus undistributed reserves not exceeding PKR 25m, annual turnover not exceeding PKR 200m, and is not formed by the splitting up or reorganisation of a company already in existence.
Individual tax
Progressive rates to 25%

Resident individuals are taxed on their worldwide income; non-residents are taxed only on their Pakistani-source income. An individual is resident if present in Pakistan for a period totalling 183 days or more in a tax year. Tax rates for an individual range from 0.50% to 25%. For salaried individuals, that is, where more than 50% of taxable income relates to salary, tax rates range from 0.25% to 20%. Dividends received are taxed by withholding.
Capital gains
Taxed as income

Capital gains of companies and individuals are generally taxed as income. Where an asset is disposed of more than 12 months after its acquisition, only 75% of the gain is taxed. Gains on the transfer of immovable property are not subject to income tax, but other taxes may apply to such transfers. Capital gains on the disposal of shares of a company listed on the Pakistani stock exchange are exempt up to the tax year ending on June 30th 2008.
Indirect tax
Sales tax rate 15%

The sales tax applies to most products. The rate is 15%, but exports are zero-rated. Exemptions include basic foodstuffs, live animals, crude oil and natural gas, petroleum products, computer hardware and software, medicine and newspapers.

Wholesalers and importers must register for sales tax, and manufacturers and retailers must register if their turnover is above PKR 5m.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: year to June 30th

Companies pay advance tax in four equal instalments. A company whose year-end is between January 1st and June 30th must file a return by December 31st following the income year; for companies with an accounting year-end after June 30th, the filing date is September 30th of the following year. The amount of advance tax is based on the tax assessed in the latest tax year. Payment of final tax is due by the date of filing the tax return. Employment income of individuals is taxed by withholding. Individuals earning taxable income must file a return of income by September 30th following the end of the tax year. Any final tax liability is payable by the due date for the tax return.
Additional tax information
Withholding taxes Dividends 10% (individuals and others, including non-residents), 5% (private resident companies, public listed companies and insurance companies), Interest 30% (non-residents), 10% (residents), Royalties 15%, Fees for technical services 15%.
Tax treaties Pakistan has concluded more than 40 tax treaties.
Dividends Tax withheld at the time of payment of the dividend is the full and final discharge of the tax liability of the recipient with respect to the dividend.
Revenue protection There is transfer-pricing and thin-capitalisation legislation.
Groups There are loss transfers for banks, financial institutions, insurance companies and companies owning and managing industrial undertakings.
Incentives Infrastructure; tourism; software and electronics; new industrial undertakings; scientific research; textiles; banking; export-oriented undertakings.
Other taxes Capital value tax, Excise duty, Fixed tax on immovable property, Foreign air travel tax, Import duties, Stamp duty, Zakat (for Muslims only).