Empowering International Businesses in Pakistan

Globalization has led to significant cross-border movements of foreign direct investment (FDI) and the establishment of multinational company operations. Developing nations, including Pakistan, are actively pursuing policies to attract Foreign Direct Investment (FDI) to fuel economic growth and improve the ease of doing business. Pakistan is committed to creating an attractive business environment by allowing 100% foreign ownership, establishing Economic Zones, and aligning trade, industrial, and monetary policies. Two significant steps have been taken to enhance investor confidence: the Inter-Governmental Commercial Transactions Act, 2022, and the Special Investment Facilitation Council (SIFC). The SIFC serves as a one-stop solution for foreign investors, with membership from provincial chief ministers and the Prime Minister. The Inter-Governmental Commercial Transactions Act, 2022 empowers Pakistan to enter Government-to-Government Agreements, offering an alternative to privatization under existing regulations.

Taxation in Pakistan falls into two categories: Direct and Indirect Taxes. Income Tax, a federal subject, is administered by the Federal Board of Revenue under the Income Tax Ordinance, 2001. Indirect taxes, such as Sales Tax on Goods and Services, Excise Duty, and Customs Duty, are also federally regulated. Sales tax on services is a provincial matter, with each province enacting its own legislation. In Islamabad Capital Territory, the Federal Government manages sales tax on services through the Islamabad Capital Territory (Tax on Service) Ordinance, 2001.

Foreign Direct Investment (FDI) is governed by various regulations, including the Foreign Exchange Regulations Act, 1947, and the Foreign Exchange Manual, 2002, issued by the State Bank of Pakistan. The Protection of Economic Reforms Act, 1992, investment treaties, and policies by the Board of Investment (BOI) play a crucial role in attracting investment. BOI’s policies align with Pakistan’s transformation into a regional trade hub, driven by initiatives like the China-Pakistan Economic Corridor (CPEC), political stability, and economic growth.

For corporate sector investments, the Companies Act 2017 is of paramount importance, along with regulations by the SECP (Securities and Exchange Commission of Pakistan).

Taxes In Pakistan

In Pakistan, the taxation framework encompasses two distinct categories of duties and taxes, each playing a crucial role in the fiscal landscape. These categories are outlined below: 

1. Direct Taxation 

Direct taxation is levied on the profits earned by individuals, corporations, and various other entities. This taxation category constitutes a pivotal component of the country’s revenue generation system.

1.1. Federal Taxation

Under the umbrella of federal taxation, the Income Tax regime takes precedence. This multifaceted tax structure is categorized into five distinct heads of income:

Salary: Pertaining to income earned through employment or professional services.

Income from Property: Involving revenue generated from property ownership and real estate ventures.

Capital Gains: Encompassing gains derived from the sale of assets, such as stocks or real estate.

Income from Business: Covering income accrued through commercial and business activities.

Income from Other Sources: Incorporating diverse sources of income beyond the aforementioned categories.

1.2.  Provincial Taxation

In addition to federal taxation, provinces impose specific levies, including but not limited to the Agriculture Tax and Professional Tax, as part of their revenue generation strategy.

2. Indirect Taxation 

Indirect taxation operates on a different paradigm, as it involves taxing the final consumers at the point of purchase of goods and services. This approach ensures a more widespread contribution to the tax pool.

2.1. Federal Taxation

The federal domain of indirect taxation encompasses various components, such as:

Sales Tax on Goods: Imposed on the sale of tangible goods at the federal level.

Federal Excise Duty (FED) on Goods and Services: A duty applied to selected goods and services, contributing to federal revenue.

Customs Duty: Levied on imported goods, regulating cross-border trade and bolstering federal finances. 

2.2. Provincial Taxation

 Provincial governments also partake in indirect taxation, notably through:

Sales Tax on Services: Encompassing services offered and consumed within the respective provinces.