Taxation in Pakistan

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Taxation in Pakistan is a cornerstone of the country’s economic framework, managed by the Federal Board of Revenue (FBR). The FBR operates under the Ministry of Finance and is tasked with formulating tax policies, collecting federal taxes, and ensuring compliance with tax laws. It oversees various tax departments, including those dealing with customs, income tax, and sales tax. Additionally, the FBR plays a crucial role in drafting tax-related legislation and implementing measures to combat tax evasion. The taxation system in Pakistan encompasses both direct and indirect taxes, which contribute significantly to the nation’s revenue. Taxation in Pakistan is a complex system of more than 70 unique taxes administered by at least 37 agencies of the Government of Pakistan.^[1] According to the FBR, in 2021, the number of registered tax filers had grown to 7.1 million out of which only 2.5 million were active tax filers.^[2] As of January 1, 2025 number of Active Taxpayers reached to 5,901,783.^[3]

Taxation in Pakistan has evolved since the country’s independence in 1947, largely based on the British colonial tax system. Initially, Pakistan inherited the tax structures and administrative mechanisms of British rule, which included a comprehensive framework for indirect taxation. Over the years, however, Pakistan has modified and adapted these systems to better suit its unique economic and social landscape. Key reforms have included the introduction of progressive income taxation and tax incentives to support industrial growth. Despite efforts to modernize, remnants of the colonial tax system, such as the heavy reliance on indirect taxes, continue to influence the current structure. Taxation reforms over time have included digitalization, such as the introduction of computerized systems and electronic filing methods, aimed at improving tax compliance and streamlining processes.

The Income Tax Act of 1922 was prevalent during the British Raj and was inherited by both the governments of India and Pakistan upon independence and partition in 1947. This act initially formed the basis of both countries' Income Tax codes.

The Income Tax Ordinance was the first law on Income Tax which was promulgated in Pakistan from 28 June 1979 by the Government of Pakistan.

To update the tax laws and bring the country's tax laws into line with international standards, the Income Tax Ordinance 2001 was promulgated on 13 September 2001. It became effective from 1 July 2002. Following the recent budget, the Income Tax Ordinance as amended up to June 30, 2024 and the updated Finance Act 2024 are now available! ^[4]

IT (Income Tax) rules 2002 were promulgated by the Federal Board of Revenue (FBR) on 1 July 2002 in exercise its powers granted under section 237 of the Ordinance.

The Federal Board of Revenue (FBR) is the principal tax administration body in Pakistan. It is responsible for formulating, implementing, and enforcing tax laws. The FBR has faced criticism for its inefficiency and corruption, which has hindered tax collection efforts. The FBR operates under the Ministry of Finance and is tasked with:

1. Implementing tax laws.
2. Collecting tax revenues.
3. Preventing tax evasion and fraud.
4. Facilitating taxpayer services.

The Federal Board of Revenue (FBR) is responsible for administering federal taxes, while provincial revenue authorities handle taxes within their respective jurisdictions. Notable provincial authorities include:

1. Punjab Revenue Authority (PRA)
2. Sindh Revenue Board (SRB)
3. Khyber Pakhtunkhwa Revenue Authority (KPRA)
4. Baluchistan Revenue Authority (BRA)

These bodies are tasked with collecting provincial taxes, such as sales tax on services, and implementing regional tax policies. The FBR has taken various steps to improve tax compliance, including the implementation of e-filing systems, offering tax amnesty schemes, and running public awareness campaigns.

Federal income taxes are administered by the Federal Board of Revenue. The period from July 1 to June 30 is considered as a normal tax year for Pakistan tax law purposes.

Income Tax: This tax is levied on the income of individuals, associations of persons (AOPs), and corporations. For instance, individuals earning less than PKR 600,000 annually are exempt from income tax, while those with annual earnings exceeding PKR 6 million are taxed at the highest rate of 35%.

Corporate Income tax rates: Corporate tax is imposed on the profits of corporations at a standard rate of 29%. The tax structure is progressive, aiming to fairly distribute the tax burden across different income groups. Currently, the Corporate Income tax rate is 29% for tax year 2019 and onwards whereas the corporate tax rate is 35% for Banking Industry for TY 2019.

Income Tax on Export of Services, in Pakistan is 1%. However, export of IT services is taxed at reduced rate of 0.25% in registered with PSEB, Pakistan Software Export Board.^[5]

In addition to Corporate Tax, there are other applicable income taxes including Super Tax, Minimum Tax, and Tax on Undistributed reserves.

Generally, manufacturing business is taxable at Corporate Tax rate whereas trading business and commercial imports business is taxable as "minimum tax". For example, 5.5% withholding income tax is applicable on commercial imports and is payable at the import stage. This 5.5% withholding tax will be considered as minimum tax and Corporate Tax is also applicable, whichever is higher will be the tax liability, on this business.^[6]

Indirect tax or more commonly knows as sales tax is also applicable on supply of goods and provision of services.

Sales Tax: A value-added tax imposed on the sale of goods and services. It is a significant source of revenue for the federal and provincial governments. Under the 18th Amendment to the Constitution of Pakistan, the right to charge sales tax on services has been given to the provincial governments where as the right to charge sales tax on goods has been given to the federal government. Consequently, provincial revenue authorities were created to manage and collect provincial sales tax in their respective provinces.

Below is a summary of the applicable sales tax rates in Pakistan:^[7]

1. Sales tax on goods: 18%
2. Sindh Sales tax on services: 15%
3. Punjab Sales tax on services: 16%^[8]
4. Balochistan Sales tax on services: 15%
5. Khyber Pakhtunkhwa (KPK) Sales tax on services: 15%
6. Islamabad Capital Territory (Tax on Services): 15%^[9]

Customs Duty: Imposed on the import and export of goods. This tax is intended to regulate trade and generate revenue from international transactions.

Excise Duty: Levied on the production of specific goods such as alcohol, tobacco, and petroleum products.

Provinces have the authority to administer and collect certain taxes, including: Property Tax: Tax levied on the ownership of real estate.

Agriculture Income Tax: Tax on income derived from agricultural activities.

Professional Tax: Imposed on individuals engaged in specific professions or occupations.

According to new Tax Laws (SRO-1006) all tier-1 retailers are required to integrate their POSs with FBR’s real time invoicing system in Pakistan.^[10] It is also mandatory for all restaurants to integrate their POSs. These FBR Invoicing system and FBR Integrated POS systems^[11] should be able to handle sales, returns and exchanges. Around 11,744 POS terminals have been integrated with the real-time reporting system by July 31, the FBR has announced.

For speeding up the process, the FBR on Aug 9 through SRO1005 (I)/2001 announced a prize scheme to encourage tier-1 retailers to get themselves integrated with the real-time sales reporting system. Many medium- and small-sized tier-1 retailers of various types have yet to integrate their point-of-sale (POS) with the Federal Board of Revenue (FBR) for real-time reporting of sales.To facilitate these Tier 1 retailers in Pakistan with integration and installation of such POS systems Tier3 has launched FBR POS Integration Software – FBR POS.^[12] A specialised advance Inventory management and POS system is specially developed for retailers in Pakistan keeping in focus the info security and integrity of data and processes involved.

Active Taxpayers List is a database which is mainted by Federal Board of Revenue on their website. Taxpayers in Pakistan are categorized into three categories.

1. In-Active: Those who are not registered with FBR or not filing their tax-returns.
2. Active: Those who file their tax-returns on time. Usually before September 30.
3. Active (Late Filer)^[13]: If someone filed their last tax-returns after due date.

Late Filer category was introduced by Finance Act 2024.^[14] Active and Late Filer status is same except for buying and purchase of properties. If you're late filer you will be charged double than active filer.^[15]

The FBR has surpassed its collection target by RS 247 billion from July to March of current fiscal year 21-22, which represents increase by 29.1% over the collection of rupees 3,394 billion during the same period last year. On the other hand, gross collections also increased by 28.9%.

FBR has tried to increase the advance tax rates for non-filers to enforce the filing of returns. but this step could not show any extra-ordinary success.

However, with the incorporation of Section 114B in the Income Tax Ordinance, 2001, vide Finance Act 2022, FBR can now enforce the filing of Income Tax Returns by disabling mobile phones, sims, electricity connections, gas connections and restricting foreign travel of non-filers. ^[16]

Despite its potential, Pakistan's taxation system faces several significant challenges:

1. Low Tax-to-GDP Ratio: Pakistan’s tax-to-GDP ratio remains lower than the global average. In recent years, the ratio has been approximately 9.5%, far below that of neighboring countries like India (16%) and Bangladesh (12%). This indicates inefficiencies in tax collection and necessitates systemic reforms.
2. Tax Evasion: A substantial portion of the economy operates in the informal sector, leading to widespread tax evasion. This undermines revenue generation and hampers the effectiveness of tax policies.
3. Over-reliance on Indirect Taxes: Pakistan’s tax system is heavily dependent on indirect taxes, such as sales tax, which are regressive and disproportionately affect low-income individuals.
4. Corruption: According to a 2002 study, 99% of 256 respondents reported facing corruption with regard to taxation. Furthermore, 32% of respondents reported paying bribes to have their tax assessment lowered, and nearly 14% reported receiving fictitious tax assessments until a bribe was paid.^[17]

The government has introduced various reforms and initiatives to address these challenges and improve the tax system:

Broadening the Tax Base: Efforts have been made to expand the number of taxpayers and increase revenue collection from previously untapped sources.

Automation: The introduction of automated tax systems, such as the Iris system, has helped streamline tax administration, reduce corruption, and improve transparency.

Tax Incentives: The government has introduced various tax incentives to encourage voluntary compliance, such as exemptions for certain industries and tax breaks for foreign investors.

The FBR fell short of its revenue target for the first two months of the current fiscal year but still surpassed its annual collection target for FY23, reaching Rs. 9.285 trillion.^[18]

Pakistan has collaborated with international organizations such as the International Monetary Fund (IMF) and the World Bank to reform its taxation system and improve fiscal policies. The IMF has supported Pakistan through programs like the Extended Fund Facility (EFF), which focuses on structural reforms aimed at enhancing revenue mobilization. The World Bank has also provided technical assistance, particularly through the Tax Reform Support Program, which aims to modernize the tax system by promoting digital solutions and building the capacity of tax authorities. Additionally, Pakistan has signed Double Taxation Agreements (DTAs) with various countries to facilitate international trade and investment and prevent the issue of double taxation for cross-border transactions.

Taxation is essential for financing public goods and services, infrastructure projects, and social programs in Pakistan. Revenue generated through taxes supports large-scale national initiatives such as:

China-Pakistan Economic Corridor (CPEC): A major infrastructure and development project aimed at boosting economic growth.

Benazir Income Support Program (BISP): A social safety net providing financial assistance to low-income families.

Sehat Sahulat Program: A health insurance scheme for underprivileged populations. These initiatives highlight the central role of taxation in sustaining economic development and improving social welfare. However, inefficiencies within the system have hindered the full realization of tax revenue potential, necessitating ongoing reforms to enhance efficiency and equity.

Looking ahead, Pakistan aims to further digitize its taxation system to increase transparency, reduce bureaucracy, and foster a culture of tax compliance. Recent initiatives such as the Tax Asaan mobile application, which allows taxpayers to file returns electronically, and the expansion of the Iris e-filing system, are part of efforts to simplify tax administration. Structural reforms are expected to enhance revenue collection, reduce dependency on external borrowing, and move the country toward a more equitable and efficient tax system.

• Bahl, R., Wallace, S., & Cyan, M. (2008). Pakistan: Provincial government taxation (No. paper0807). International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

1. Federal Board of Revenue
2. Economy of Pakistan