Introduction To Different

Taxation Laws Of Pakistan

Prof. Javed Anwar
 Brief overview of different direct and
indirect taxes
• Federal taxes in Pakistan like most of the
taxation systems in the world are classified
into two broad categories, viz., direct and
indirect taxes. A broad description regarding
the nature of administration of these taxes is
explained below:
 Brief overview of different direct and
indirect taxes
• DIRECT TAXES
• Income Tax
• Direct taxes primarily comprise of Income
Tax. In the Income Tax Ordinance, 2001, tax is
levied generally on the net income of a
taxpayer earned during a tax year computed by
applying the specified tax rates as applicable
to respective taxpayer.
 Brief overview of different direct and
indirect taxes
• For the purpose of the charge of tax and the
computation of total income, all income is
classified under the following heads:
– Salary
– Income from property
– Income from business
– Capital gains; and
– Income from other sources.
 Brief overview of different direct and
indirect taxes
• Capital Value Tax
– Capital value tax on different
transaction such as transfer of
immoveable property, transfer of rights
etc.
 Brief overview of different direct and
indirect taxes
• INDIRECT TAXES
• Following are the indirect taxes under the Pakistani Taxation
System.
• Custom Duty
– Goods imported and exported from Pakistan are liable to rates of
customs duties as prescribed in Pakistan Customs Tariff. Customs
duties in the form of import duties and export duties constitute a major
part of the total tax receipts. The rate structure of customs duty is
determined by a large number of socio-economic factors. However, the
general scheme envisages higher rates on luxury items as well as on
less essential goods. The import tariff has been given an industrial bias
by keeping the duties on industrial plants and machinery and raw
material lower than those on consumer goods.
 Brief overview of different direct and
indirect taxes
• Federal Excise Duty
– Federal Excise duties are levied on a limited number of
goods produced or manufactured, and services provided or
rendered in Pakistan. On most of the items Federal Excise
duty is charged on the basis of value or retail price. Some
items are, however, chargeable to duty on the basis of
weight or quantity. Classification of goods is done in
accordance with the Harmonized Commodity Description
and Coding system which is being used all over the world.
All exports are liable to Zero per cent Federal Excise Duty.
 Brief overview of different direct and
indirect taxes
• Sales Tax
• Sales tax is levied at various stages of economic activity at the
rate of 17 per cent on:
– All goods imported into Pakistan, payable by the importers;
– All supplies made in Pakistan by a registered person in the course of
furtherance of any business carried on by him;
• There is an in-built system of input tax adjustment and a
registered person can make adjustment of tax paid at earlier
stages against the tax payable by him on his supplies. Thus,
the tax paid at any stage does not exceed 17% of the total sales
price of the supplies.
 Tax reliefs in cross border transactions
• In cross border transactions, Pakistan taxation system provides
the following types of reliefs:
• Unilateral Relief
– A person resident in Pakistan is entitled to a relief in tax on
any income earned abroad, if such income has already been
subjected to tax outside Pakistan. Proportionate relief is
allowed on such income at an average rate of tax in
Pakistan or abroad, whichever is lower.
 Tax reliefs in cross border transactions
• Agreement for avoidance of double taxation and fiscal
evasion with respect to Taxes
– The Government of Pakistan has so far signed agreements
to avoid double taxation with more than 50 countries
including almost all the developed countries of the world.
These agreements lay down the ceilings on tax rates
applicable to different types of income arising in Pakistan.
They also lay down some basic principles of taxation
which cannot be modified unilaterally.
 Handling Corporate Losses
and Gains
 Corporations that sustain a net operating
loss can carry that loss back (Carryback) 2
years and forward (Carryforward) 20 years
to offset operating gains in those years.

• Losses are generally carried back first and

then forward starting with the earliest year
with operating gains.
 Corporate Losses and
Gains Example
Lisa Miller is examining the impact of an operating
loss at Basket Wonders (BW) in 2003. The following
time line shows operating income and losses. What
impact does the 2003 loss have on BW,
calculate corporate income tax and income
tax return?
2000 2001 2002 2003

$150,000 $150,000 $100,000 -$500,000

 Solution:

Year Income Tax calculation Tax (Tax return)

2000 $ 150,000 22,250+0.39 (150,000 – 100,000) $ 41,750
2001 $ 150,000 22,250+0.39 (150,000 – 100,000) $ 41,750
2002 $ 100,000 13,750+0.34 (100,000 – 75,000) $ 22, 250
2003 ($ 500,000) All Tax return of year 2001-02 ($ 64,000)

Note: See the next slide for loss adjustments and tax returns.
 Corporate Losses and
Gains Example
The loss can offset the gain in each of the years 2001
and 2002. The remaining $250,000 can be carried
forward to 2004 or beyond.

Year 2000 2001 2002 2003

Income $150,000 $150,000 $100,000 -$500,000

Loss adjustment -$150,000 -$100,000 $250,000

Loss adjusted $150,000 0 0 -$250,000

Income
Example 2: Loss adjustment and Tax Return

• ABC corporation has reported the following

income through year 2011:

Year 2008 2009 2010 2011

Taxable income $76,000 $ 112,000 ($ 180,000) $ 63,000

Requirement: Compute corporate tax (or tax

return) for each of the given year.
 Solution

Year Income Tax calculation Tax (Tax return)

2008 $ 76, 000 13,750 + 0.34 (76000 – 75000) $ 14,090
2009 $ 112,000 22,250 + 0.39 (112000 – 100000) $ 26,930
2010 ($ 180,000) All tax return of year 2008 and a ($ 39,820)
portion from 2009
2011 $ 63, 000 7,500+ 0.25 (63,000 – 50,000) $ 10,750
 Loss Adjustment
Year 2008 2009 2010 2011
Income $ 76,000 $ 112,000 ($ 180,000) $ 63,000
Loss Adjustment - $ 76,000 -$ 104,000 $ 180,000 0
Loss Adjusted Income 0 $ 8,000 0 $ 63,000

All Tax return of the year

$ 14,090 No impact
Tax on $ 8,000 = 0.15 x 8,000
= $ 1, 200
Tax return = 26,930 – 1,200
= ($ 25,730)

Total Tax Return

14,090 + 25730
= ($39,820)