The corporate tax rate in Pakistan is 29% for large companies. It is higher for the banking sector and stands at 39%. Small companies’ tax rate is 20% if they fulfill certain requirements. Understanding these tax rates and their implications is crucial for businesses operating in Pakistan. This article provides an in-depth overview of the corporate tax structure, including criteria for small companies, super tax, tax filing requirements, tax credits, and deductions.
| Company Type | Tax Percentage |
|---|---|
| Banking Company | 39% |
| Public Company | 29% |
| Any other company | 29% |
| Small company | 20% |
Criteria for Small Companies
A small company must follow the 20% tax rate criteria:
- Must be registered after 1st July 2005
- The number of employees must not exceed 250
- Annual income less than PKR 250 million
- Paid-up capital plus undistributed reserves not exceeding PKR 50 million
- Must not be formed by splitting from an existing business
These criteria ensure that only genuinely small businesses benefit from the lower tax rate, promoting entrepreneurship and growth in the small business sector.
Read about Property Tax Rates in Pakistan.
Super Tax
In addition to regular tax rates, super tax is applied upon specific income thresholds.
| Income Above | Income Below | Super tax rate (%) |
|---|---|---|
| 150 million | 200 million | 1 |
| 200 million | 250 million | 2 |
| 250 million | 300 million | 3 |
| 300 million | 350 million | 4 |
| 350 million | 400 million | 6 |
| 400 million | 500 million | 8 |
| 500 million | – | 10 |
The super tax is an additional levy on higher-income brackets, ensuring that the wealthier segments contribute more towards national revenue.
Tax Filing Requirements
- Filing Deadline: Annual tax returns must be filed by December 31 following the end of the tax year (June 30).
- Online Filing: Companies can file tax returns electronically via the FBR’s IRIS system.
Timely and accurate filing of tax returns is crucial to avoid penalties and ensure compliance with national tax laws.
Tax Credits and Deductions in Pakistan
Summary of Tax Exemptions and Credits in Pakistan under the Income Tax Ordinance, 2001
Exemptions:
Electric Power Generation Projects: Exempt from tax if agreements are made with the government by June 30, 2021, and letter of support obtained by June 30, 2023.
Collective Investment and REIT Schemes: Exempt if at least 90% of accounting income is distributed to unit holders. Reduced WHT rate of 3% for management services by REIT companies.
Transmission Line Projects: Exempt for ten years for projects set up from July 1, 2015, to June 30, 2022.
Special Economic Zones: Exempt for ten years from the start of commercial operations.
Bagasse/Biomass Cogeneration Power Projects: Exempt with a reduced WHT rate of 7.5% on dividends.
Deep Conversion Refineries: Exempt for 20 years (10 years for existing refineries after upgrading), approved before December 31, 2021.
National Power Parks Management Company: Exempt from the start of commercial operations and after privatization.
Cinema Operations: Exempt for five years from the start of operations.
Venture Capital Companies and Funds: Exempt until June 30, 2025.
Charitable Organizations: Exempt subject to prescribed conditions.
Special Technology Zones (STZs):
- Zone Enterprises: Exempt for ten years from license issuance.
- Zone Developers: Exempt for ten years from signing the development agreement.
- Venture Capital Fund Investments: Exempt for ten years from license issuance.
Withdrawn Exemptions and Credits:
- Tax Credit for Hiring Fresh Graduates.
- First-Year Depreciation Allowance (90%) on Specified Assets.
- Tax Credit for Enlistment on Stock Exchange.
- Tax Credits for New Industrial Undertakings.
- Exemptions for Refining and Concentrating Business in Mineral Exploration.
- Concessions for Oil and Gas Exploration Companies.
- Exemptions on Profits from Loans to Non-Residents.
- Distributions from Registered Collective Investment Schemes.
- Profits from Manufacturing Cellular Mobile Phones.
100% Tax Credit for Export of IT and IT-enabled services: Replaced with a reduced WHT of 0.25% on export proceeds for tax years 2024 to 2026, subject to registration with the Pakistan Software Export Board. Read more about Income Tax for Freelancers in Pakistan.
Capital Gains Tax
The CGT rate for non-equity funds has been increased from 10% to 15% for individuals. For corporations, there is no change and will continue to be taxed at 25%. The tax on CGT in equity funds (for individuals, AOPs, and corporates) was increased to 20% from 12.5% in the draft Budget. However, now it has been scaled down to 15% in the final approved budget.
| Category | Individual | Corporate |
|---|---|---|
| Equity Funds | 15% | 15% |
| Non-Equity Funds | 15% | 25% |
Dividend-Tax
- Tax on dividend income from Money market and income funds has now increased to 25% from 15% for both Individual/AOPs and Corporates
- Tax on dividends from Equity Funds will continue to be taxed at 15% for both Individual/AOPs and Corporates.
| Category | Individual | Corporate |
|---|---|---|
| Equity Funds | 15% | 15% |
| Non-Equity Funds | 25% | 25% |
Detailed Analysis of Corporate Tax Rates
Pakistan’s current corporate tax structure reflects a significant effort to balance revenue generation with economic growth. By maintaining higher tax rates for the banking sector, the government targets sectors with higher profitability. The differentiated rates for large and small businesses aim to support the latter’s growth and sustainability.
Historical Context of Corporate Tax in Pakistan
Corporate tax rates in Pakistan have evolved over the years, reflecting changes in economic policies and priorities. Historically, the focus has been on creating a favorable business environment while ensuring adequate revenue collection. The current tax rates are part of ongoing reforms to broaden the tax base and enhance compliance.
Future Implications and Predictions
The corporate tax landscape in Pakistan is likely to see further changes as the government continues to refine its tax policies. Future adjustments may focus on simplifying the tax code, reducing compliance burdens, and incentivizing investment in key sectors.
Conclusion
Understanding the corporate tax rates in Pakistan is essential for businesses to ensure compliance and optimize their tax liabilities. By staying informed about the latest tax policies and utilizing available credits and exemptions, companies can effectively manage their tax obligations and contribute to the country’s economic development.
FAQs
What is the tax rate for banking companies in Pakistan?
The tax rate for banking companies in Pakistan is 39%.
How is the super tax applied?
The super tax is an additional levy on higher-income brackets, ranging from 1% to 10% based on specific income thresholds.
What are the criteria for a company to qualify as a small company?
A small company must be registered after 1st July 2005, have no more than 250 employees, an annual income less than PKR 250 million, paid-up capital plus undistributed reserves not exceeding PKR 50 million, and must not be formed by splitting from an existing business.
Are there any tax exemptions for specific sectors?
Yes, there are several exemptions for sectors such as electric power generation, collective investment and REIT schemes, transmission line projects, special economic zones, and others, as outlined in the Income Tax Ordinance, 2001.
What are the filing requirements for corporate tax returns in Pakistan?
Corporate tax returns must be filed annually by December 31 following the end of the tax year (June 30) and can be filed electronically via the FBR’s IRIS system.