Country Snapshot: Pakistan - Deloitte Global

 

The prime minister heads the government, but the president is the de facto head of the executive and leads the National Security Council, which comprises military chiefs, cabinet members and the leader of the opposition.

General Pervez Musharraf, who took power in 1999 and subsequently held a referendum to validate his role, will remain president until at least 2007.

Leading export markets: the US (largest), the UAE, the UK, China and Germany.

Major exports: Textiles (largest), rice, leather products, carpets, surgical equipment and sports goods.

Pakistan ranks 58th of 60 countries in the Economist Intelligence Unit's business environment rankings.

Foreign investors are allowed to invest up to 100% equity in all industrial sectors without prior permission, with a few exceptions. New investment in consumer alcohol manufacture is banned.

There are no restrictions on the transfer of private company shares, but only public companies may sell shares on the stockmarket. The process of formation of a company is straightforward, and approval for dividend remittance is automatic based on an entitlement certificate obtained at the time of formation of the company. Branches are subject to many restrictions and, for example, may not bid directly for government tenders. The permission for a branch is allowed only in case of a definite contract awarded to a foreign company and is usually limited to five years.

In June 2005 the government increased the minimum wage from PKR 2,500 per month to PKR 3,000 per month.

Under the social security scheme, employers with more than ten workers pay 7% of wages to cover the risks of sickness, maternity and employment injury, and 6% for pension benefits. In addition, contributions to the Workers' Profit Participation Fund and Workers' Welfare Fund are 5% and 2% of pre-tax profit, respectively. Industrial firms must pay one month of basic salary as a bonus to employees when there is a profit.

There are no restrictions on employing foreigners, and foreign firms may appoint foreign citizens as chief executives. There is protection for workers against unjust dismissal but no similar requirement for white-collar employees, whose employment is regulated only by the employment contract.

Resident companies are taxed on worldwide income; non-resident companies are taxed on Pakistani-source income only. A company is resident if incorporated or formed under any law of Pakistan, or if control and management of the company are wholly in Pakistan at any time during the year. The corporate tax rate in fiscal year 2005/06 (July–June) is 35% for public companies, 37% for private companies and 38% for banking companies. The rates for private companies and banks are to be reduced to 35% by 2007. Small companies (as defined in the Companies Ordinance) are subject to a lower 20% rate, according to certain conditions. Companies newly listed on the stock exchange during the period from July 2005 to June 2006 are entitled to a 1% rebate in the year of listing. A minimum tax applies at 0.5% of turnover.

Resident individuals are taxed on their worldwide income; non-residents are taxed on their Pakistani-source income only. An individual is resident if present in Pakistan for a period totalling 182 days or more in a tax year. Individual income tax is charged at progressive rates to 35%, but employment income is subject to separate rates that rise progressively to 30%. Dividends received are taxed by withholding.

Capital gains of companies and individuals are generally taxed as income. Where an asset is disposed of more than 12 months after its acquisition, only 75% of the gain is taxed. Gains on the transfer of immovable property (acquired otherwise than for resale) are not subject to income tax, but other taxes may apply to such transfers.

The sales tax applies to most products. Wholesalers and importers must register for sales tax, and manufacturers and retailers must register if their turnover is above PKR 5m. The rate is 15% but exports, goods specified in the Fifth Schedule to the Sales Tax Act 1990 and certain goods notified by the government for this purpose, are zero-rated. Exemptions include basic foodstuffs, live animals, crude oil and natural gas, petroleum products, computer hardware and software, medicine and newspapers.

 

Companies pay advance tax in four equal instalments. A company whose year-end is between January 1st and June 30th must file a return by December 31st following the income year; for companies with an accounting year-end after June 30th the filing date is September 30th of the following year. The amount of advance tax is based on the tax assessed in the latest tax year. Payment of final tax is due by the date of filing the tax return. Employment income of individuals is taxed by withholding. Individuals who fall into certain specified categories must file a return of income by September 30th following the end of the tax year. Any final tax liability is payable by the due date for the tax return.

 

Country Snapshot: Pakistan (151 KB)

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Page Last Updated: December 9, 2005

Source: Deloitte Touche Tohmatsu (English)