Direct Tax Incentives for Investors
Direct Tax Incentives for Investors has been continuously been introduced over the years.
Generating Employment
Where a new manufacturing unit is set up, the owner can avail tax breaks for 10 years equal to 2% of tax for every 50 employees registered with social security for a maximum of 10% starting from the year in which production has commenced.
Enlisting in Stock Market
Where a company enlists in Pakistan Stock Exchange in Pakistan, it shall be allowed a tax credit equal to 20% of the tax payable for initial 2 years and 10% for last 2 years.
Investment to Extend, Expand, Modernize or Replace Industrial Equipment
Where a company invests in purchase of plant and machinery for the purposes of extension, expansion, Balancing, Modernization and Replacement etc. they will be allowed a tax credit equal to 10% of their investment.
Investment for new Industrial Undertaking
If a company owns at least 70% of equity in a new industrial undertaking, it shall be allowed a proportionate tax credit to according to equity-investment ratio. In cases of an industrial undertaking financed by Foreign Direct Investment
Taxation of Income of a Company being a Member of an Association of Persons
An Association of Persons is liable to tax at specified rates. The share of a member of an Association of Persons is exempt from tax. However, the same shall be added in partners’ income for rate purpose only.
Minimum Tax Regime
The minimum tax regime has also been lowered to a certain extent in some industries such as the oil industry and poultry breeder 0.5% and 0.2% for distributors of pharmaceutical products, fast moving consumer goods and cigarettes, rice and flour mills.
Shariah Compliant Listed Company
Tax rate for a listed company shall be reduced by 2%, if:
- It fulfils prescribed shariah compliant criteria approved by State Bank of Pakistan, SECP and FBR,
- Derives income from manufacturing activities only,
- Has declared taxable income for the last 3 consecutive tax years; and
- Has issued dividend for the last 5 consecutive tax years.
Start-Ups
Start means a business of a resident individual, AOP or a company that commenced on or after 1.7.2012 and the person is engaged in or intends to offer technology driven products or services to any sector of the economy provided that the person is registered with and duly certified by the Pakistan Software Export Board (PSEB) and has turnover of less than Rs 100 Million in each of the last five tax years.
Direct Tax Incentives for Investors
Profits derived by a start-up is exempt for the tax year in which the start-up is certified by the PSEB and the following two tax years. Minimum Tax and withholding tax provision are not applicable.
Online Market place
Online Market place means an information technology platform run by e-commerce entity over an electronic network that acts as a facilitator in transactions that occur between a buyer and a seller. Minimum tax shall be 0.5% and tax rate on commission and brokerage shall be 5%
Import of Goods
Imports of goods where title passes outside Pakistan and is supported by import documents is exempt from tax deduction.
Educational & Medical
If education or medical expenses are remitted abroad by the individual to non-resident, exemption against withholding tax will be allowed.
Tax Credits Profit on Behbood Savings Certificates or Pensioners’ Benefit Account
The Behbood Certificates are not subject to withholding tax and subject to maximum rate of tax of 10%. If income falling in slabs on which tax rate is higher than 10%, a tax credit equal to additional tax above 10% will be available.
Tax Credits for Teachers
Full time teachers are allowed tax credits to the tune of 40% of tax payable.
Senior Citizen Allowance
Senior citizens will be allowed a 40% tax reduction where the income does not exceed Rs.1,000,000.
Advance Tax at Import Stage
A new regime for advance tax has also been put into effect decreasing the tax rate of various industries. An example is the ship breaking industry with advance tax being deducted at the rate of 4.5% of import value.
Exemptions for Mutual Funds
Mutual funds are exempt from income tax if UPTO 90% of its income is distributed as dividend subject to provisions in Pakistani law.
Exemptions for Fruit Processing Plant
Under the 2014 Finance Act, profits from a fruit processing plant set up in Baluchistan, Malakand Division, Gilgit or FATA are exempt from tax for 5 years provided the taxpayer is engaged in the process of locally grown fruits.
Coal Plants
Coal plants in Sindh for supply of coal exclusively to power stations have been exempted from tax. Furthermore, these companies also have their dividend tax reduced to 7.5%.
Developmental Reith Scheme
A developmental REIT scheme established by 30th June 2020 will have reduced rate on dividend by 50% on recipient for three years from setting up of the scheme.
Allowance for Manufacturer of Cell Phones
Companies manufacturing cell phones will be allowed a first-year allowance and an exemption of tax for 5 years from the month of commencement.
New Tax Regime for Immovable Properties
The standard valuation method as described above has been replaced by a transaction value method. Now, there will be no standard rate for the taxation authorities whilst examining a case relating to acquisition of immovable property.
Filmmaking Exemptions
Tax payable by foreign and local filmmakers has been reduced by 50%.
Immunity from Probing
Immunity from probing has been provided to investments made by an individual in a Greenfield industrial undertaking provided that the investment is made on or after January 1, 2014 and commercial production is commenced by June 30, 2019. This exemption is subject to certain conditions.
Shariah Compliant Listed Companies
The rate of corporate tax on companies will be decreased by 2% in case of companies compliant with the relevant shariah regulations.
Future Exemptions
Exemption to Profits and gains derived by a refinery set up between the 1st day of July 2018 and the 30th day of June 2023 with minimum 100,000 barrels per day production capacity for a period of twenty years beginning in the month in which the refinery is set up or commercial production is commenced, whichever is later. Exemption under this clause shall also be available to existing refineries, if—
- a) existing production capacity is enhanced by at least 100,000 barrels per day;
- b) the refinery maintains separate accounts for income arising from aforesaid additional production capacity; and
- c) the refinery is a deep conversion refinery.
Loan to SME – Tax Reduction
Under the existing regime, all income of banking companies is subject to uniform rate of tax of 35%. It is now proposed that ‘income’ from advances to the following will be subject to reduced rate of 20% for tax years 2020 to 2023:
- a) Micro and small enterprises;
- b) Low cost housing finance; and
- c) Farm credit.
The above terms are defined as per State Bank of Pakistan’s Prudential Regulations. With regard to farm credit and low-cost housing finance, advances would not qualify for the above concessional rate and the same is subject to submission of details of advances along with gross and net margin earned from such advances.
