Income Tax Law in Pakistan

Who Is Liable to Pay Income Tax?

Income tax in Pakistan applies to a broad range of entities, including:

• Salaried individuals
• Business owners and self-employed persons
• Companies and firms
• Associations of Persons (AOPs)
• Foreign nationals with income sourced from Pakistan

Residents are taxed on both domestic and international income, while non-residents are taxed only on income earned within Pakistan.

Types of Taxable Income

Under the Income Tax Ordinance, taxable income is categorized into the following heads:

               1. Salary

               2. Business or profession

               3. Capital gains

               4. Income from property (rent)

               5. Income from other sources (such as dividends, interest, and royalties)

Each category has specific rules for deductions, exemptions, and tax rates.

Income Tax Rates in Pakistan

The FBR updates tax slabs annually in the Federal Budget:

For Salaried Individuals (Residents)

Note: These rates may vary depending on government policies and inflationary adjustments.

For Non-Salaried Individuals (Business income)

The tax slabs are generally higher compared to salaried individuals, with the top rate also reaching up to 35%.

• Corporate Tax
• Companies: 29% (standard rate)
• Small companies: 20%
• Banks: 39%

Filing of Tax Returns

Every individual or entity earning taxable income must file an annual income tax return along with a wealth statement (in the case of individuals). The return can                be submitted online through the IRIS portal on the FBR website.

              Filer vs. non-Filer

Filing tax returns qualifies a person as a “filer”, granting benefits such as:

• Lower withholding tax on banking transactions
• Eligibility to purchase property above a certain value
• Lower tax rates on vehicles and other financial dealings
• Non-filers, on the other hand, face higher withholding taxes and may be restricted from certain transactions.

Penalties for Non-Compliance

Failure to file income tax returns or misreporting income can result in:

• Fines and penalties
• Additional tax
• Audit and scrutiny by FBR
• Prosecution in severe cases

Recent Reforms and Digital Initiative

• To improve tax compliance and widen the tax base, the FBR has introduced several reforms, including:
• Digital profiling of citizens using data from banks, utility bills, and travel history
• Introduction of POS (Point of Sale) systems
• Automated notices and audit selection
• Integration of tax data with NADRA and other institutions

Challenges in Pakistan’s Tax System

• Despite reforms, Pakistan's tax-to-GDP ratio remains low. Key issues include:
• Tax evasion and underreporting
• Informal economy
• Lack of public trust in tax utilization
• Limited enforcement capacity of FBR