Doing Business in Pakistan

DOING BUSINESS IN PAKISTAN

2012

Doing Business in Pakistan

2012

1. 2. Disclaimer 3. About Us 4. The country 5. Forms of business enterprise 6. Direct taxation 7. Exchange controls 8. Other forms of taxation

TABLE OF CONTENTS . . . . .. .. . . .. .. 3 4 5 7 10 14 18 22 24 24

9. Labour relations and social security 10. Grants and incentives 11. Quality of life

Appendices A Rates of tax C Withholding tax rates

.. .. ..

28 29 33

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Disclaimer
Every care has been taken in compiling this booklet to give some insight of doing business in Pakistan. We have tried our best to make it comprehensive about the general information, legal, accounting, auditing, tax and labour rules/requirements that regulate businesses in Pakistan. However, all the laws and requirements cannot be summarized in this general booklet and specific advice may please be sought. The booklet is a general information and is not intended to be a comprehensive document. These notes have been compiled by Mr. Irfan Ilyas, FCA, Partner; Ilyas Saeed & Co., Chartered Accountants, A-4, Sea Breeze Homes, Shershah Block, New Garden Town, Lahore - Pakistan. Telephone no: +9242 35861852, +9242 35868849 Mobile no: +92300 8440423 Fax no: +9242 35856145 www.ilyassaeed.com irfan@ilyassaeed.com For any further clarification or further details, direct reference may please be made to Mr. Irfan Ilyas at the address and the telephone numbers given above. We look forward to assist you in your business growth in Pakistan.

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ABOUT US
MGI
Midsnell Group International is a leading worldwide association of independent auditing, accounting and consulting firms, established in 1947. It has now over 280 officers in more than 82 countries. All MGI members offer personal services with high partner contact to expanding business both locally and internationally. Every local MGI firm can provide up-to-the-minute information on world side business practices, international taxation solutions and strategic alliance opportunities. The detailed report providing key issues and information for potential investors considering business in different countries is provided by MGI representative offices.

ILYAS SAEED & CO

Ilyas Saeed & Co., Chartered Accountants is a public accountancy and management consultancy firm in Pakistan. It provides a wide range of professional services to private and public companies/corporations and multi-national conglomerates. Founded in 1979, ISCO maintains its Head Office at Lahore. The Firm also continues to maintain other offices in the major cities of Pakistan (Karachi, Islamabad and Gujranwala). ISCO is Pakistan member firm of Midsnell Group International. The Firm has always been maintaining satisfactory rating of QCR from ICAP and has been placed in Category A list of Auditors by the State Bank of Pakistan. ISCO, therefore, is fully competent to undertake any and all sorts of audit and revaluation assignments. The Firm sticks to its mission as; Best Professional Services at the most Appropriate Cost and Time

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4. COUNTRY 4.1 Geography Pakistan is a profound blend of landscapes varying from plains to deserts, forests, hills, and plateaus ranging from the coastal areas of the Arabian Sea in the south to the mountains of the Karakoram range in the north. Pakistan is bordered by Iran to the west while the the country in the north and southern boundary of Pakistan kilometers of coastline. Pakistan 803,940 square kilometers. Its Pass and Bolan Pass that have between Central Eurasia and South Afghanistan to the north-west and People's Republic of China borders India to the east. Along the runs the Arabian Sea with 1,064 covers an area of approximately western borders include the Khyber served as traditional migration routes Asia.

Pakistan is a federal republic with four provinces, capital territory (Islamabad) and territory consisting of tribal areas and Gilgit Baltistan. Pakistan also administers Azad Kashmir and the Northern Areas, portions of the Jammu and Kashmir region. 4.2 Economy

The economy of Pakistan is the 47th largest in the world in nominal terms and 27th largest in the world in terms of purchasing power parity (PPP). Pakistan has a semiindustrialized economy, which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. Growth poles of Pakistan's economy are situated along the Indus River diversified economies of Karachi and Punjab's urban centers coexist with lesser developed areas in other parts of the country. GDP of Pakistan is $ 210.8 billion (nominal) and $ 534 billion (GDP-PPP) at growth rate of 2.4% for the year 2011. Exports are around $ 25 billion (2011); mainly comprise of US 15.8%, UAE 7.9%, China 7.3%, UK 4.3% and Germany 4.2% (2010). Whereas imports are around $ 41 billion (2011); mainly comprises petroleum, petroleum products, machinery, plastics, transportation equipment, edible oils, paper and paperboard, iron and steel. Most of imports are made from China 17.9%, Saudi Arabia 10.7%, UAE 10.6%, Kuwait 5.5%, US 4.9%, Malaysia 4.8% (2010).

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4.3

Currency and Banking:

The rupee is the currency of Pakistan. The issuance of the currency is controlled by the State Bank of Pakistan, the central bank of the country. The most commonly used symbol for the rupee is Rs, used on receipts when purchasing goods and services. In Pakistan, the rupee is referred to as the "rupees", "rupaya" or "rupaye". The banking sector of organized. Most of the branches in the Country and with them with quality national banks have invested information technology and the art facilities to the is the regulatory body for its autonomous status. 4.4. Government/ Politics Pakistan is very modern and leading international banks have local banks are also competing services. Both foreign and heavily in infrastructure and thus are able to provide state of customers. State Bank of Pakistan the banks, which has established

Politics of Pakistan have taken place in the framework of a federal republic, where the system of government has at times been parliamentary, presidential, or semi-presidential. In the current parliamentary system, the President of Pakistan is the largely ceremonial head of state, the Prime Minister is head of government, and there is a multi-party system. Executive power is exercised by the government. Legislative power is largely vested in the Parliament. However military coups have been a routine. Military dictatorship sometimes went for Marshal Law and sometimes a mature of political-military government. 4.5 Legal System

The constitution of the Islamic Republic of Pakistan of 1973 provides for Parliamentarian form of Government. The Prime Minister (elected by the National Assembly) is the head of Government and the President (collectively elected by the National Assembly, the Senate and the Provincial Assemblies) is the head of the federation. The National Assembly has 342 members who are elected from all provinces, the capital territory and tribal areas on the basis of population. The Senate derives equal representation from all the four provinces and has a total membership of 100. Pakistans legal system is based on English common law, adapted to the needs of an Islamic state. High Court and Supreme Court of Pakistan are the highest forum of judiciary at provincial and national level, respectively. Additionally, the Shariat court is responsible for ensuring that the Countrys laws are as per Islamic injunctions.

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5. FORMS OF BUSINESS ENTERPRISE 5.1 Sole Proprietorship

An individual, who desires, may set up his own business as sole proprietorship without any registration except with tax authorities. 5.2 Partnership Firm

A partnership firm can be established by executing a partnership deed on a stamp paper of Rs. 500/and getting the same Notarized by the authorised Notary Public Magistrate. The Partnership Act, 1932 is the legal framework for partnership firms and a firm may or may not be registered with the Registrar of Firms. 5.3 Limited Partnership

As per Companies Ordinance, 1984 none of the partnership is allowed to be registered as limited partnership. Liability of partners remains unlimited in all circumstances. 5.4 Companies

The Companies Ordinance, 1984 and The Companies Rules, 1985 provide the legal framework for operations of companies in Pakistan where as the Securities and Exchange Commission of Pakistan is the regulatory authority in this regard. In Pakistan, a company may be formed with or without limited liability and the Ordinance provides for the following categories of the companies:
a. b. c. a. b. c.

A company limited by shares; or A company limited by guarantee; or An unlimited company Private company Public company Single Member Company (SMC)

Companies formed in any of the above categories can further be classified in two types:

Any two or more persons associated for any lawful purpose may, by subscribing their names to the Memorandum of Association (document that defines the objectives of the company) and complying with the registration requirements, form a private company. Minimum number of members is three for a listed company. There is no limitation as to the maximum number of members of public company where are for private company, there is upper limit of 50 members. After complying with

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the prescribed requirements; public may offer its shares and other securities to the general public. The public company may get its shares and other securities listed on the stock exchange(s). A private company;
a. b. c.

Restricts the right to transfer its shares, if any; Limits the number of its members to fifty; Prohibits any invitation to the public to subscribe for the shares, if any, or debentures of the company.

The name of every public limited company should include the word Limited as the last word of the name. And the name of every private company and a company limited by guarantee should respectively include the parenthesis and word Private and Guarantee before the last word Limited. Commission may grant licence to a non-profit association for the promotion of commerce, art, science, religion, sports, social services, charity or any other useful object to be registered as a company with limited liability without the addition of the words Limited, (Private) Limited or (Guarantee) Limited as the case may be, to its name. The schedule of fees for registration of a company is as following:
a. b.

For registration of a company whose nominal share capital does not exceed Rs. 100,000 the fee shall be Rs. 2,500. For registration of a company whose nominal share capital exceeds Rs. 100,000, a fee of Rs. 2,500 is payable along with an additional fee to determine according to the amount of nominal share capital as follows. i. ii. For every 100,000 rupees of nominal share capital or part of 100,000 rupees, after the first 100,000 rupees, up to 5,000,000 rupees, a fee of Rs. 500. For every 100,000 rupees of nominal share capital or part of 100,000 rupees, after the first 5,000,000 rupees, a fee of Rs.125.

For registration of a company the total amount of fee to be paid shall not exceed ten million rupees. A single person may form a single member company (SMC) on fulfilment of certain legal conditions. 5.5 Trusts The Trust Act, 1882 provides the legal framework for operations of trusts in Pakistan. The Trust Act provides for the following categories of the trusts: a) Public or Charitable Private b) Express, i.e, one which is clearly and directly created in express world by the settler. Implied, indirectly gathered from unexpressed but presumable intention of settler. c) Constructive, arise by operation of equity in favour of another. For value Voluntary d) Executed, i.e., when it is fully and finally declared by instrument creating it.

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5.6

Joint Ventures

A joint venture (JV) is a business agreement in which parties agrees to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares. 5.7 Cooperatives

A cooperative is a business organization owned and operated by a group of individuals for their mutual benefit. The Cooperative Societies Act, 1925 provide the legal framework for operations of cooperative society in Pakistan. Subject to the provisions contained in a Societies Act, 1925 a society which has as its object the promotion of the economic interests of its members in accordance with co-operative principles, or a society established with the object of facilitating the operations of such a society, may be registered under this Act with or without limited liability.

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6.

DIRECT TAXATION

Direct taxes are levied or charged on the annual income of taxpayer. Direct taxation consists of Income Tax. 6.1 Income Tax - Individual

The Income Tax Ordinance, 2001 and Income Tax Rules, 2002 provide the legal framework for the levy, collection and other matter related to income tax. The levy of income tax is an annual charge on the taxable income of individual taxpayer. The return of total income shall be filed by such dates as prescribed by Board; in the following table: Sr. No. 1 (i) Taxpayer An Association of persons: and Last Date of Filling of Return

(ii) An Individual. Filling of the following statement or return: a) Annual Statement of deduction of 31st day of August next following the income tax from salary by employers; end of the tax year to which it relates. b) Return of income by salaried person through e-portal; or c) A statement u/s 115(4) (taxable under FTR) 2 An AOP or an individual other than as 30th day of September next following specified above in serial no. 1 the end of tax year to with return relates.

6.2

Income Tax - Company

The Income Tax Ordinance, 2001 and Income Tax Rules, 2002 provide the legal framework for the levy, collection and other matter related to income tax. The levy of income tax is an annual charge on the taxable income of company. The Income Tax Ordinance, 2001 provides a broader definition of the Company which includes: A company as defined in the Companies Ordinance, 1984 A body corporate formed by or under any law in force in Pakistan A body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies A trust, a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force.

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A foreign association, whether incorporated or not, which the Federal Board of Revenue has, by general or special order, declared to be a company for the purposes of this Ordinance A provincial Government A Local Government A Small Company as defined in section 2(59A) of the Income Tax Ordinance, 2001

6.3

Sources of Income The Income Tax Ordinance, 2001 classifies income into the following categories (called heads of income) and prescribes the allowable deductions against each head: Salary Income from Property Income from Business Capital Gains Income from Other Sources

Taxable income under a specific head means the income as reduced by allowable deductions. The net income from each head is added to arrive at the total income for the year, however, income from certain sources is subject to separate taxation, or is subject to presumptive tax. Under the presumptive tax regime, the income is subject to deduction of tax at source which becomes the discharge of final tax liability in respect of that income. The taxation of income from a certain source under the normal or presumptive tax regime is notified by the Government and such classification once advised may also change. At present income from following sources is taxed under the final tax regime: 6.4 Dividend received from a listed company Prize on a prize bond or winnings from raffle, lottery, quiz or crossword puzzle, or prize offered by companies for promotion of sale. Travelling agents commission Contracts other than service contracts Royalty and fee for technical services of non-residents

Scope of Total Income for Tax Purposes The Residential status of an assessee is also an important concept as it determines the scope of total income for tax purposes. In the case of a resident assessee the total taxable income means income from all sources within and outside Pakistan subject to the provisions of double taxation treaties, while in the case of a non-resident individual it is restricted to Pakistan source income only.

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An individual is a resident individual if he is present in Pakistan for 182 days or more in a tax year or if he is an employee or official of the Federal or Provincial Government posted abroad. A Company is considered to be resident when either it is incorporated or formed by or under any law enforceable in Pakistan or, the control or management of which is situated wholly in Pakistan at any time during the tax year. A registered firm, un-registered firm and association of persons is considered resident when its management and control is situated (either wholly or partly) in Pakistan. 6.5 Tax Year and Filling of Return The tax year shall be a period of twelve months ending on 30th June of every year 'hereinafter referred to as 'normal tax year''. All assessees except companies are required to file their return of income for the tax year at the latest by 30th September immediately following the close of that tax year. Companies are required to file their return of income for the tax year at the latest by 31st December immediately following the close of that tax year. Federal Board of Revenue has prescribed different period of twelve months to be the tax year for various businesses. These different periods are called Special Tax Year. Accordingly the last date for filling the return of income is also different as prescribed for the normal tax year. Presently prescribed, special tax years and last date of filing the return are as following:
Business Tax Period (Year ending on) Companies Manufacturing Sugar All persons exporting Rice All persons carrying on the business of rice husking All persons carrying on the business of oil milling All persons carrying on the Business of manufacturing and dealings in shawls All Insurance Companies 30th September 31st December 31st August 31st August Filling of Return (Latest by) 31st March 30th June 28th or 29th February 28th or 29th February

31st March 31st December

30th September 30th June

A person may apply, in writing, to the Commissioner of Income Tax to allow him to use a twelve months' period, other than the normal tax year, as a special tax year and the Commissioner may by an order, allow him to use such special tax year. In case of a class of persons having a special tax year, the Central Board of Revenue may permit it, by a notification in the Official Gazette, to use the normal tax year as its tax year.

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6.6

Tax Rates The rates of tax applicable to various assessees are provided as Annexure 1. Special Rules for Taxation of Certain Businesses The Income Tax Ordinance, 2001 provides for separate provisions for taxation of the following businesses: The fourth schedule to the Ordinance provides the rules for the taxation of profits and gains of Insurance Business. The fifth schedule to the Ordinance provides the rules for the taxation of profits and gains from the exploration and production of petroleum profits and gains from the exploration and extraction of mineral deposits (other than petroleum).

6.7

Tax on Capital Gain

Profit and gain form the disposal of capital assets is taxable under the head capital gain. Gain on capital assets other than securities (not based on interest) shall be taxable u/s 37 of the Income Tax Ordinance, 2001. While gain on disposal of securities shall be taxable u/s 37A of the Income Tax Ordinance, 2001. 6.8 Withholding Taxes

The Income Tax Ordinance, 2001 provides a complete procedure for the withholding tax system. Section 148 to Section 169 of The Income Tax Ordinance, 2001 deals with the deduction of tax at source on certain payments. Nature of such payments and pertinent rate of tax deduction is provided as Annexure 2. 6.9 Gift Tax

At the time of transfer of gift, no capital gain or loss shall arise where the recipient is a resident in Pakistan in the relevant tax year. The recipient of the gift shall be treated to have acquired the gift at the fair market value at the time of such transfer. 6.10 Death Duties An inheritance tax or estate tax is a levy, paid by a person who inherits money or property or a tax on the estate (total value of the money and property) of a person who has died. In some jurisdictions the term used is death duty. At the time of transfer of property by inheritance, no capital gain or loss shall arise where the recipient is a resident in Pakistan in the relevant tax year. The recipient of the property shall be treated to have acquired the property at the fair market value at the time of such transfer.

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7. EXCHANGE CONTROLS Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents. Common foreign exchange controls include:

Banning the use of foreign currency within the country Banning locals from possessing foreign currency Restricting currency exchange to government-approved exchangers Fixed exchange rates Restrictions on the amount of currency that may be imported or exported Repatriation of Earnings and Royalty Payment

7.1

Full repatriation of capital, capital gains, dividends and profits, is allowed. The facility for contracting foreign private loans (which does not involve any Guarantee by the Government of Pakistan) is available to all those foreign investors, who make investment in sectors open to foreign investment, for financing the cost of imported plant and machinery required for setting up the project. However, loan agreements should be registered / cleared by the State Bank of Pakistan. Foreign controlled manufacturing companies / concerns will be allowed unlimited domestic borrowing according to their requirements for working capital. Authorized Dealers are authorized to grant rupee loans and credits to foreign controlled companies for meeting their working capital requirements subject to observance of Prudential Regulations prescribed under the Banking Companies. Manufacturing Sector

Royalty / Technical/ Services / Franchise Fees a) b) There is no restriction on payment of royalty and/or technical service fees for the manufacturing sector. However, such agreements shall be registered with the State Bank of Pakistan. The payments of royalties and technical service fees to foreign companies will be taxed at 15%. However, reduced rates under the treaties with different countries remain applicable. Non-Manufacturing Sector

The payment of franchise, royalty or technical fee in case of non-manufacturing sectors is allowed subject to following conditions: In case of foreign investment in non-manufacturing sectors including food sector, the initial / lump sum fee should not exceed US$ 100,000 irrespective of number of outlets under on franchise.

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A maximum 5% of net sales (excluding 15% Sales Tax) in the food sector may be allowed as franchise fee only for those items which are core items of the franchise and are the specialties of the trade name. The payment of such fees be allowed on monthly basis. No item will be eligible for twice payment of royalty/franchise fee, e.g, soft drinks, etc. Percentage/amount of fees etc., for other non-manufacturing projects is also be upto the maximum of 5% of net sales (excluding 15% Sales Tax). Initial period for which such fees may be allowed to projects in non-manufacturing sectors should not exceed 5 years. Subsequent extension in time period may be considered provided these projects also make investment in allied upstream projects. The agreements conforming to above guidelines will be sent by the sponsors to State Bank of Pakistan for its information. However, any relaxation or deviation from the guidelines will require prior approval of the Cabinet Committee on Investment (CCOI). 7.2 Restriction on Amount Taken Out of Pakistan

Following are the restrictions which may be granted conditionally or unconditionally by the State Bank, no person in, or resident in, Pakistan shall: (a) (b) make any payment to or for the credit of any person resident outside Pakistan; draw, issue or negotiate any bill of exchange or promissory note or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favour of any person resident outside Pakistan; make any payment to or for the credit of any person by order or on behalf of any person resident outside Pakistan; place any sum to the credit of any person resident outside Pakistan; make any payment to or for the credit of any person as consideration for or in association with the receipt by any person of a payment or the acquisition by any person of property outside Pakistan; the creation or transfer in favour of any person of a right whether actual or contingent to receive a payment or acquire property outside Pakistan; draw, issue or negotiate any bill of exchange or promissory note, transfer any security or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favour of any person as consideration for or in association with any matter.

(c) (d) (e) (i) (ii) (f)

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7.3

Local Borrowing

Foreign controlled companies are normally required to meet their requirements of capital expenditure out of their Rupee resources or from loans raised abroad with the permission of the Federal Government/State Bank. In special circumstances such companies are allowed to raise Rupee resources through medium and long term local borrowings. As an exception, foreign controlled companies engaged in manufacturing are permitted to meet their requirements of capital expenditure by taking loans from banks, development finance institutions and other financial institutions or by issuing participation term certificates etc. 7.4 Emigrants

Emigration is the act of leaving one's country or region to settle in another. It is the same as immigration but from the perspective of the country of origin. Human movement in general is termed migration. There are many reasons why people might choose to emigrate. Some are for reasons of religious, political or economic freedom or escape. Others have personal reasons such as marriage. Some people living in rich nations with cold climates choose to move to warmer climates when they retire. Motives to migrate can be either incentives attracting people away, known as pull factors, or circumstances encouraging a person to leave, known as push factors, for example: Push Factors

Lack of employment or entrepreneurial opportunities Lack of political or religious rights Restrictions on practice of religion Shortage of farmland; hard to start new farms Oppressive legal/political conditions Military draft, warfare Famine or drought Cultural fights with other cultural groups Expulsion by armed force or coercion Better opportunities for acquiring farms for self and children Cheap purchase of farmland Instant wealth (as in California Gold Rush) More job opportunities Higher pay Prepaid travel (from relatives) Better welfare programmes

Pull Factors

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Better schools Join friends and relatives who have already moved Build a new nation Build religious community Political freedom Cultural richness Inheritance

7.5

Inheritance provisions in Pakistan depends on religious affinities. All persons of sound mind, regardless of their nationality or residential status, are entitled by law to inherit immovable and/or movable property in Pakistan, but the inheritance provisions depend on whether the deceased was a Christian, a Hindu, or a Muslim. Within the Muslim category, the definitions of heirs, and their shares, are decided according to their sects and sub-sects, e.g. Cutchi Memon, Khoja, Sunni or Shia. 7.6 Immigrants

Immigration (derived from Latin: migratio) is the act of foreigners passing or coming into a country for the purpose of permanent residence. Immigration is made for many reasons, including economic, political, family re-unification, natural disaster, poverty or the wish to change one's surroundings voluntarily. 7.7 Contract Worker/ Temporary Resident

Contract workers are self-employed, and the duration of each contract varies. In most cases, contract workers are compensated per project or on a per-hour basis and do not qualify for benefits. Common examples of contract workers are those in the construction field and freelancers. contract workers in the construction field are often hired by a middleman, commonly known as a contractor. A person shall be treated as short term resident / temporary resident if the following conditions are met: The person is an individual. The nationality of a person is immaterial in this case. The person is resident only due to his employment in Pakistan; and The person is in Pakistan for a period which is not more than three years.

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8. OTHER FORMS OF TAXATION 8.1 Sales Tax/VAT

The VAT-mode Sale Tax has become a salient feature of the countrys tax policy. Sales Act 1990 forms the legal frame work for the operation and collection of sales tax. The Collectorate of Sales Tax a division of the Central Board of Revenue (CBR) is the regulatory authority in this regard. Sales tax is payable on monthly basis at the rate of 15, 17.5 & 20 % of the value of supplies net of the amount of input tax i.e. paid on purchases. The following persons are required to obtain the Sales tax registration: 1. A manufacturer whose annual turnover from taxable supplies made in any period during last twelve months ending any tax period exceeds five million rupees. 2. A service provider whose annual turnover from taxable services made in any period during last twelve months ending any tax period exceeds five million rupees. 3. A retailer whose value of supplies made in any period during last twelve months ending any tax period exceeds five million rupees. 4. An importer. 5. A wholesaler including dealer and distributor. The Government promotes the sales tax registration and it is a must for doing business with most of Government departments, Corporations and large Companies. To solicit such business a manufacturer, service provider or retailer may obtain voluntary registration at the time of commencing the business even if his turnover does not fall within the limits prescribed for compulsory registration. 8.2 Stamp Duty

The Stamp Act, 1899 is the legal framework for stamp duties. All instruments chargeable with duty and executed by any person in Pakistan shall be stamped before or at the time of execution. 8.3 Property Tax

Property Tax levied by the Provinces through their respective Property Tax Act. In Punjab, The Urban Immovable Property Tax Act, 1958. Levy of Tax: Government may by notification specify urban areas where tax shall be levied under this Act. Provided that one urban area may be divided into two or more rating areas or several urban areas may be grouped as one rating areas.

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8.4

Payroll Taxes

Payroll taxes are also called salary taxes. Provisions relating to the tax of a resident salaried person are as follows: What is Salary? Salary means amount received by an employee from any employment, whether of a capital or revenue nature. It includes pay and perquisites. Pay means wages or other remuneration like leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees and gratuity. Perquisite means benefit whether convertible to money or not given to employee over and above pay and wages, e.g. - utilities allowance, conveyance allowance, provision of vehicle and accommodation etc. Who is a Salaried Person? An individual is treated as a salaried person if more than 50% of his total income comprises of salary income or he/she derives income entirely from salary. Every salaried person is obliged to pay tax on salary, if salary exceeds prescribed limits. Taxability of Salary While computing the taxable salary income of a person, all perquisites, allowances or benefits, except exempt items are to be included in the salary and such gross figure shall be treated as the taxable salary income of a taxpayer. Following allowances are exempt from tax subject to the following conditions: Medical Allowance Exempt upto 10% of basic salary, if free medical treatment or hospitalization or re-imbursement of medical or hospitalization charges is not provided. (See Clause (139)(b) of Part I of Second Schedule of ITO 2001) Special Allowance Exempt if granted to meet expenses for the performance of official duties. (See Clause (39) of Part I of Second Schedule of ITO 2001) Tax Reducers The tax calculated above can be reduced to a prescribed limit if the salaried person is a senior citizen or a full time researcher or teacher. The gross tax calculated as per applicable rates of tax is subject to reduction for senior taxpayers and full time teacher or researcher. Teacher or Researcher

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A reduction of 75% of tax on income from salary is available to a full time teacher or researcher, employed in a non-profit education or research institution duly recognized by HEC, any university or board and government training and research institution. Senior Taxpayers If the age of the taxpayer on the first day of a tax year is 60 years or more and taxable income does not exceed Rs.1,000,000 the gross tax qualifies for a reduction of 50%. (See Clause (1A) of Part III of Second Schedule of ITO 2001) Tax Rates Tax rates applicable to salaried person are enclosed as per Appendices A. 8.5 Fringe Benefits Taxes

Perquisite means benefit whether convertible to money or not given to employee over and above pay and wages, e.g. - utilities allowance, conveyance allowance, provision of vehicle and accommodation etc. While computing the taxable salary income of a person, all perquisites, allowances or benefits, except exempt items are to be included in the salary and such gross figure shall be treated as the taxable salary income of a taxpayer. 8.6 Tariffs

A tariff may be either tax on imports or exports (trade tariff), or a list or schedule of prices for such things as rail service, bus routes, and electrical usage (electrical tariff, etc.). 8.7 Thin Capitalization Rules

Thin capitalization rules determine how much of the interest paid on corporate debt is deductible for tax purposes. Such rules are primarily of interest to private-equity firms, which use significant amounts of debt to finance leveraged buyouts. A company said to be thinly capitalized when its capital is made up of a much greater proportion of debt than equity, i.e. its gearing, or leverage, is too high. This is perceived to create problems for two classes of people:

creditors bear the solvency risk of the company, which has to repay the bulk of its capital with interest; and revenue authorities, who are concerned about abuse by excessive interest deductions.

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8.8

Transfer Pricing

When purchase and sale contracts are signed between the subsidiary and the parent company, at trade terms that favor the parent firm, it results in profit repatriation through transfer pricing. This kind of tilted transfer pricing, that favors high prices when the parent company sells something to its subsidiary, allows for effective transfer of profits from the subsidiary to the parent. Though this method is legal, it can cross the borders of legality if the transfer prices used are completely out of line with the market rates and are also blatantly overinflated. It is legal but only if the transfer prices are reasonable and justifiable.

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9. LABOUR RELATIONS AND SOCIAL SECURITY 9.1 Labour Market

Pakistan has one of the largest labour and manpower resources in the world, due to its large population, which is the sixth largest in the world. According to data produced by the CIA World Factbook, the total number of Pakistan's labour force is 55.8 million, making it the ninth largest country in terms of available human workforce. About 43% of this labour is involved in agriculture, 20.3% in industry and the remaining 36.6% in other services. 9.2 The Right to Work Nationals

Since creation of Pakistan, five labour policies have been announced by the government in year 1955, 1959, 1969, 1972, 2002 and Labour Policy 2010. Pakistan has a huge work force, around 55.8 million people. And every one has right to work except child labour. 9.3 The Right to Work - Non Nationals

Around 4 million refugees from Afghanistan came over Pakistan in wars with Russia and America. They are free to work in Pakistan anywhere. And no specific rules restrict them and they are just required to get registered with NADRA authorities. 9.4 The Employer-Employee Relationship

Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as: "A person in the service of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed." 9.5 Labour Regulations

Since creation of Pakistan, five labour policies have been announced by the government in year 1955, 1959, 1969, 1972, 2002 and Labour Policy 2010. According to Labour Policy 2010, Workers right to form unions. Adequate security of job Facility of proper matching job opportunities Promotion to higher jobs Better work conditions

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9.6

Social insurance schemes Force labour in all forms to be eliminate The Social Partnership Worker Participation

Provincial Employees Social Security Ordinance 1965 is in operation and covers the contingencies of employment injury, sickness and maternity. It is financed entirely through employers contribution at the rate of 6 % of the wages of secured workers up to Rs. 10,000/-p.m. The scheme is administrated by the provincial governments. Employees old age benefits scheme is operated under Employees Old Age Benefits Acts, 1967 and covers establishments employing 5 or more persons. All employees, irrespective of their salaries cover under the scheme.

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10. GRANTS AND INCENTIVIES 10.1 Grants Available Grants are funds disbursed by one party (Grant Makers), often a Government Department, Corporation, Foundation or Trust, to a recipient, often (but not always) a nonprofit entity, educational institution, business or an individual.

11. QUALITY OF LIFE 11.1 Housing Pakistan Housing Authority, a subsidiary of Ministry of Housing & Works, was established to undertake construction of high quality apartments at affordable prices. It is for the first time ever that the Government of Pakistan has engaged itself in actual construction of affordable housing. PHA has recently been tasked to undertake following schemes.

Construction of housing units for the Officers of Federally Constituted Occupational Groups. Construction of housing units for low paid Federal Government Employees on ownership basis. Construction of housing units for the poor/needy segment of society. Education

11.2

Education in Pakistan is overseen by the government Ministry of Education and the provincial governments, whereas the federal government mostly assists in curriculum development, accreditation and some financing of research. The education system in Pakistan is generally divided into five levels: primary (grades one through five); middle (grades six through eight); high (grades nine and ten, leading to the Secondary School Certificate or SSC); intermediate (grades eleven and twelve, leading to a Higher Secondary (School) Certificate or HSC); and university programs leading to undergraduate and graduate degrees. In Pakistan, the quality of education has a declining trend. Shortage of teachers and poorly equipped laboratories has resulted in the out-dated curriculum that has little relevance to present day needs. 11.3 Transportation and Communication Sector in Pakistan

The transport and communication are of basic importance in the development process of a country, and density of the transport network is an index to economic development. As compared with developed countries, Pakistan possesses a less developed transportation network. Government

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is making serious efforts to develop an efficient transport and communication network to meet the growing needs of the country A. a) Importance of Transport and Communication Economic Importance

It promotes the internal and external trade, utilization of natural resources, mobility of labour, reduction in unemployment, increase in agricultural production, reduction in population pressure and elimination of starvation and hunger etc. b) Political Importance

It creates the political awareness in people, maintenance of law and order in society etc. It also helps bringing out the opinion of the masses. c) Social Importance

Linkage of people develops brotherhood and sense of unity, and this can stimulate economic activity within the country. It promotes the education across the country and provides the modern information by TV, Internet, radio etc. B. a) Transport in Pakistan Road Road transport is most popular and it carries about 90% of the total passenger traffic. The country has about 248,340 kilometers of roads, of which more than 50 percent are paved. The rest are graveled or unimproved tracks. Road traffic is increasing to nearly overwhelming proportions, with mixtures of animal carts, high-speed cars, buses, and trucks. The principal roads of Pakistan are GT (Grand Trunk) Road, Super Indus Highway (N55), Karakoram Highway (N-35), Makran Coastal Highway (N-10) and Motorway Projects (M1, M2, M3, M8, M9). b) Railways

Pakistan's railways cover roughly 7,791 kilometers. Most are in the Indus Valley, from Karachi to the Punjab, with a few lines into the North-West Frontier and one westward across northern Baluchistan to the Iranian border.

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c)

Air

Pakistan is served by numerous international airlines as well as its own Pakistan International Airlines, which provides both international and domestic service. International airports are located at Karachi, Islamabad, Peshawar, Quetta, and Lahore. Prior to the early 1990s the domestic airline industry was regulated by the state. After deregulation, several privately owned airlines began to operate in Pakistan. PIA has made remarkable progress. It began with a fleet of 15 aircraft. By 1999-2000, it had 45 aircraft. Today, there are three private airlines operating in the country haheen, Air Blue and Aero Asia. d) Water

Ocean shipping is extensive through Karachi, on the coast of the Arabian Sea. The city's port handles more than 95 percent of all of Pakistan's imports and exports. The city of Qasim also has a port to handle a share of the country's trade. And government is also establishing new port, Gawadar port. C. Communication

Communication plays an important role in the economic and cultural development of a country. Pakistan has following means of communication. a) Postal Service The Post office is a Federal Government entity which provides postal facilities through a network of 12828 (2178 urban and 10650 rural) post offices across the country. The department is providing various traditional postal services to the consumers at a reasonable price. It also provides the facility of life insurance, payment of military pensions, collection of motor vehicle tax, renewal of arms and driving licences etc. b) Radio

Pakistan Broadcasting Corporation (PBC) has played a pivotal role in promoting national interest by providing information, entertainment and education to audiences at home and abroad in 35 languages (19 regional, 1 sub regional, 16 foreign) from 24 Radio Stations and 5 FM Stations.

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c)

Television

First television station was introduced in Pakistan by a private television company, in November 26, 1964. In June 1967, it was converted into private limited company named as Pakistan Television Corporation Limited, with prime objectives to establish a Television Network in Pakistan for the provision of broadcasting news, documentaries, education and entertainment. There are two channels in the country namely PTV Home and PTV News. There are also operating 22 private TV channels across the country. d) Telecommunication

The Telegraph and Telephone department was converted into Pakistan Telecommunication Corporation on 15th December 1990 for better telecommunication system in the country. On 1st January 1996, the corporation was recognized by establishing the Pakistan Telecommunication Authority (PTA), the National Telecommunication Operation (NTC) and Pakistan Telecommunication Company Limited (PTCL). PTCL has issued 60,000 telephone connections to its customers. 6 Mobile companies are operating their network in Pakistan under PTA. There are at least six crore people are using mobile phone in Pakistan. e) Information Technology (IT)

IT has assumed unprecedented importance in the global economy. Government has accorded a very high priority to this sector. IT is one of the key determinants of competitiveness and growth of economy. For promotion of IT, above than 400 cities have been provided internet facility. Pakistan has established Software Technology Park at Lahore, Karachi and Peshawar. Currently, in 2006-07 Pakistan has earned 50 million dollars from software industry. The Ministry of Science and Technology has approved different projects which will be implemented in the next few years. 11.4 Social Securities Benefits Following benefits are provided by Employees Social Securities Ordinance, 1965: Sickness benefit. Maternity benefit. Death grant. Medical care during sickness and maternity. Medical care of dependents, etc. Injury benefits. Disablement Pension. Disablement Gratuity. Survivors Pension.

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Appendices

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Appendices A

INCOME TAX RATES FOR 2012

RATES OF TAX FOR INDIVIDUALS, Upto Rs. 350,000 Rs.350,001 Rs.500,000 Rs.500,001 Rs.750,000 Rs.750,001 Rs.1,000,000 Rs.1,000,001 Rs.1,500,000 Exceeds Rs.1,500,000 NIL 7.50% 10.00% 15.00% 20.00% 25.00%

RATES OF TAX FOR SALARIED INDIVIDUALS

In the case of a Salaried taxpayer, being a person having salary in excess of 50% of his taxable income, the rate of tax chargeable from the tax year 2012 as follows:Income Slab Upto Rs.350,000 Rs.350,001 400,000 Rs.400,001 450,000 Rs.450,001 550,000 Rs.550,001 650,000 Rs.650,001 750,000 Rs.750,001 900,000 Rs.900,001 1,050,000 Rs.1,050,001 1,200,000 Rs.1,200,001 1,450,000 Rs.1,450,001 1,700,000 Rs.1,700,001 1,950,000 Rate of Tax NIL 1.50% 2.50% 3.50% 4.50% 6.00% 7.50% 9.00% 10.00% 11.00% 12.50% 14.00%

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Rs.1,950,001 2,250,000 Rs.2,250,001 2,850,000 Rs.2,850,001 3,550,000 Rs.3,550,001 4,550,000 Exceeds Rs. 4,550,001 and above

15.00% 16.00% 17.50% 18.50% 20.00%

MARGINAL RELIEF

Where the total income of a salaried taxpayer marginally exceeds the maximum limit of a slab in the table the income tax payable shall be the tax payable on the maximumof that slab plus an amount equal to: 20% where the total income does not exceeds 30% where the total income does not exceeds 40% where the total income does not exceeds 50% where the total income does not exceeds 60% where the total income exceeds Rs.550,000 Rs.1,050,000 Rs.2,250,000 Rs.4,550,000 Rs.4,550,000

REBATE FOR TEACHERS & RESEARCHERS POSTED IN GOVT. INSTITUTIONS

The tax payable by a full time teacher or a researchers, employed in a non profit education or research institution duly recognized by Higher Education Commission, a Board of Education or a University recognized by the Higher Education Commission, including government training and research institution, shall be reduced by an amount equal to 75% of tax payable on his income from salary.

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INCOME FROM PROPERTY

o Rate of tax to be paid u/s 15 in case of Individual and AOP Where the GARV does not exceeds Rs.150,000 Rs.150,000 ---- Rs.400,000 Rs.400,000 ---- Rs.1,000,000 Rs.1,000,000 ---- above

NIL 5% 12500+7.5% 57500+10%

SENIOR CITIZEN ALLOWANCE

A tax rebate of 50% is available to senior citizens above the age of 60 years, if their income did not exceed Rs.1,000,000/-.

RATES OF TAX FOR ASSOCIATION OF PERSONS

The rate of tax imposed on the taxable income of Association of Persons shall be 25%.

RATES OF TAX ON RETAILERS Turnover i) Upto Rs.5 million ii) Exceeding Rs.5 million but does no exceed Rs.10 million iii) Exceeding Rs.10 million 1% Rs.25,000 plus 0.5% of the amount of turnover exceeding Rs.5 million Rs.50,000 plus 0.75% of the amount of turnover exceeding Rs.10 million Rate of Tax

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CAPITAL GAINS ON DISPOSAL OF SECURITIES

The rate of tax to be paid under section 37A shall be as follows: Type Where holding period of a security less than six months Where holding period of a security is more than six months but less than twelve months Where holding period of a security is more than one year

Rate of Tax % 10% 8% 0%

RATES OF TAX FOR COMPANIES

The rate of tax for companies falling under various categories are as under:Type Public Company other than a banking company Private Company other than Banking Company Banking Company Small Company Rate of Tax % 35% 35% 35% 25%

Rates of tax to be paid for RENTAL INCOME in case of company Where the GARV does not exceeds Rs.400,000 Rs.400,000 ---- Rs.1,000,000 Rs.1,000,000 ---- above

5% 20000+7.5% of the amount exceeding Rs.400,000 up to Rs.1,000,000 65000+10% of the amount exceeding Rs.1,000,000

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Appendix B

TAX YEAR 2012

DEDUCTION OF TAX AT SOURCE
Sec. 148

Nature of Payments
Imports

Tax Rates
5%

Remarks
In case of industrial undertaking importing goods as raw material for its own use. Tax Rate is 3% which is adjustable. ---

Adjustable or Final Discharge Final discharge

150 151

Dividend

10%

Final discharge

Profit or yield under National Saving Scheme. Profit on accounts maintained with banks and financial institutions. Bonds, Certificates, Debenture issued by a Banking Company or Financial Institution Profit on any Security issued by Federal Govt. Provincial Govt. or Local Authority 10%

o After Deduction of Zakat o In case of companies it is adjustable

Final discharge

6 152

Payment to non-residents on royalties or fees for technical services. Payment to a non-resident on execution of a contract. Payment of insurance premium to a nonresident person Any other payment (other than above) to a non-resident person

15% 6% 5% 20%

---

Final discharge Final discharge -- Final discharge Adjustable

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153

Every prescribed person (a) Sale of Rice, Cotton seed, Edible Oils (b) Sale of any other goods (c) For Transport services (d) For other services (e) Execution of a contract (except
listed Coys)

-- Sale of Goods by manufacturer in case (a) 1.5% of individual and AOP Final Discharge

(a) Final discharge (b) Final discharge (c) Minimum Tax

(d)

(b) 3.5% (c) 2% (d) 6% (e) 6% (f) 10% (g) 0.5%

Minimum Tax

(f) Payment to non resident media person (g) Payment of services of stitching, dyeing, printing, washing, sizing and wearing 154 154(2) 155 156 156(1) 156(1) 156-A 231-A 231-AA 231-B 233(1) 233-A Exports Indenting Commission Rent of house property (including furniture, fixture & services). Prize and Winning Prize on Prize Bonds Raffle, Lottery, Quiz, Prize for Promotion of Sales, Cross Words Puzzle Commission or Discount to Petrol Pumps Cash withdrawal from Exceeding Rs.25,000/Sale against cash of any instrument D.D, P.O, CDR, SIDR, SDR, RTC Purchase of Motor Car and Jeeps Commission and Brokerage Members of Stock Exchange

(e) Final discharge (f) Final discharge (g) Final discharge

------------------------Final discharge Final Discharge Final Discharge Final discharge Final discharge Final discharge Final discharge Adjustable Adjustable Adjustable Final discharge

1% 5% 5% to 10% 10% 10% 20% 10% 0.2% of the amount withdrawn 0.3% Rs.7,500/- to Rs.50,000/10%

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(a)

2012
(a) 0.01% of Purchase Value Minimum Tax Minimum Tax Minimum Tax Adjustable --(a) One Rupee per Kg. of Laden Weight (a) (b) (c) Final discharge Adjustable Adjustable

On Purchase of Share

(b) On Sale of Shares (c) Trading of Shares (d) Financing of Carryover Trades 234 Passenger Transport (a)
(c)

(b) 0.01% of Sale Value (c) 0.01% of Traded Value (d) 10% of Carryover Charge

Goods Transport vehicles.

Passenger Transport/Vehicle plying for hire having seating capacity 4 or more.

(b) Private Motorcars.

(b) Rs.750 to Rs.8000/(c) Rs.25/- to Rs.100/- per seat

234-A 235

CNG Station Electricity Consumption

4%
Rs.80 to Rs.1500/- if Bill does not exceeds Rs.20,000/10% if bill exceeds Rs.20,000/- for commercial consumers 5% if Bill exceeds Rs.20,000/- for Industrial Consumers

----

Final Discharge
Adjustable in case of company. Minimum tax upto bill amount of Rs.30,000/- per month for taxpayers other than company. Adjustable if bill amount is above Rs.30,000/- per month for taxpayers others than company.

236

Telephone user (a) Upon Mobile and pre-paid cards (a) 10% (b) Post Paid Telephone Bills (b) 10% of the amount of bill where bill exceeds Rs.1,000/ 5% of the Gross Value of Auction Amount 5% of the Gross amount of Air Ticket

--Adjustable Adjustable ----Adjustable. Adjustable.

236-A 236-B

Advance Tax at the time of Sale by Auction Advance Tax on purchase of domestic Air Tickets.

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