Pakistan Tax Regime

Pakistan operates a worldwide corporate income tax system layered with an unusually dense set of minimum-tax and turnover-based backstops: a standard 29% corporate rate for most companies, 39% for banking companies, a preferential 20% rate for qualifying small companies, a progressive super tax on high earners rising to 10%, minimum tax on turnover of 1.25%, and an Alternate Corporate Tax (ACT) requiring payment of the higher of 17% of accounting income or the ordinary tax liability. The system is administered by the Federal Board of Revenue (FBR) under the Income Tax Ordinance, 2001, and is heavily oriented toward withholding and final-tax regimes for exports, services and specific sectors, reflecting a policy emphasis on securing tax collection at the point of payment in an economy with a large informal sector.

1.1 Sources

Primary legislation includes the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, the Federal Excise Act, 2005, and annual Finance Acts (most recently Finance Act, 2025) that amend rates, thresholds and special regimes.

1.2 Recent developments

Finance Act, 2025 reduced super tax rates by 0.5 percentage points for income bands exceeding PKR 250 million and up to PKR 500 million, moderating the slab structure introduced by Finance Act, 2023 that set a maximum super tax rate of 10% on income above PKR 500 million. Finance Act, 2025 also introduced a new withholding-based tax on digital transactions conducted through e-commerce platforms, at 1% for digital or banking-channel payments and 2% for cash-on-delivery transactions, designating payment intermediaries and courier service providers as withholding agents. Finance Act, 2024 amended the export-of-goods final tax regime so that the 1% withholding on export proceeds is now treated as a minimum tax rather than an automatic final discharge, requiring exporters to also compute normal taxable income and pay any incremental liability, and rendering them liable to super tax on the same basis as other taxpayers.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

2.1 Rates and residence

A company is resident in Pakistan if it is incorporated under Pakistani law, or if the control and management of its affairs is situated wholly in Pakistan at any time in the tax year. Resident companies are taxed on worldwide income; non-resident companies operating through a branch are taxed on Pakistan-source income attributable to that branch at the same rates applicable to a company. The federal corporate tax rate is 29% for most companies (including public companies other than banking companies), 39% for banking companies, and a reduced 20% rate for qualifying small companies as defined under the Income Tax Ordinance. There is no general lower rate for undistributed profits; the headline rate applies to taxable income regardless of distribution policy.

2.2 Super tax on high earners

Super tax applies in addition to ordinary corporate tax. For tax years 2023 to 2026 it ran on progressive slabs from 1.0% (income between PKR 150 million and PKR 200 million) through 1.5%, 2.5%, 3.5%, 5.5% and 7.5% up to 10.0% for income exceeding PKR 500 million, as last amended by the Finance Act, 2025. The Finance Act, 2026 replaced that schedule with effect from tax year 2027: banking companies, petroleum exploration and production companies taxed under Part I of the Fifth Schedule and persons deriving income from the sale of fertilizer pay 10% on income exceeding PKR 150 million, while all other persons pay 8% on income exceeding PKR 500 million and no super tax below that level. Super tax was reintroduced in tax year 2022 and has been the subject of constitutional litigation regarding its retrospective application and sector-specific enhanced rates for that year, with the matter sub judice before the Supreme Court as of the most recent review; the current uniform slab structure applicable to all sectors from tax year 2023 onward is not affected by that litigation.

2.3 Minimum tax on turnover and Alternate Corporate Tax

Where the tax otherwise payable by a company is less than 1.25% of turnover, the company must instead pay minimum tax equal to 1.25% of turnover (with reduced rates from 0.25% to 0.75% for specified sectors), except where a statutory exemption from minimum tax applies. Tax paid in excess of the normal liability under this mechanism may be carried forward for adjustment against normal tax liability in the following two tax years. Separately, under the Alternate Corporate Tax (ACT), most companies (excluding insurance companies, oil and gas exploration and production companies, banking companies, and companies already enjoying a reduced tax rate) must pay the higher of 17% of accounting income or the corporate tax liability otherwise determined, including any minimum tax on turnover; exempt income, capital gains on specified listed securities, income covered by a 100% equity-investment tax credit, and income of non-profit organisations and welfare institutions are excluded from the ACT base.

2.4 Income determination and deductions

Taxable income is computed under the Income Tax Ordinance by reference to business income determined on an accrual basis, adjusted for specific statutory inclusions and exclusions. Ordinary and necessary business expenditure is deductible, subject to disallowance of expenses lacking proper documentation (including a general requirement that payments above prescribed thresholds be made through banking channels to be deductible), caps on certain related-party and head-office expense allocations for permanent establishments, and specific limitations on entertainment, donations and similar discretionary spending. Depreciation follows prescribed rates under the Ordinance's depreciation schedule, generally on a declining-balance basis, with initial allowances available for qualifying new plant and machinery.

2.5 Interest limitation

Deductibility of interest paid on loans obtained by a non-resident to finance the operations of its Pakistani permanent establishment is denied entirely, along with any related insurance premium, reflecting Pakistan's approach of disallowing head-office-sourced financing costs for branch operations rather than applying a proportionate EBITDA-style cap. For ordinary related-party debt between Pakistani entities, thin-capitalisation-style restrictions can limit deductibility of interest on debt exceeding prescribed debt-to-equity thresholds for foreign-controlled resident companies, with disallowed interest treated as a non-deductible distribution-equivalent.

2.6 Losses

Business losses (other than speculation losses, which carry forward separately for up to six years and offset only speculation income) may be carried forward for up to six years and set off against income from any business source in those years. Unabsorbed tax depreciation and amortisation may be carried forward indefinitely. There is no loss carryback. Losses computed under final-tax or minimum-tax regimes described in sections 2.2 and 2.3 do not generate ordinary carryforward losses in the same way as losses under the normal tax regime.

2.7 Group taxation

Pakistan permits group relief and group taxation (tax consolidation) for eligible groups of companies meeting specified ownership thresholds (generally 55% or more common ownership for listed group companies, 75% or more for unlisted), subject to formal election and FBR approval. Under group relief, a surrendering company's losses may be transferred to a claimant company within the same group in exchange for consideration equal to the tax value of the loss surrendered, while group taxation allows a holding company to file a consolidated return with its eligible subsidiaries.

2.8 Controlled foreign companies

Pakistan taxes resident companies on worldwide income, and the Income Tax Ordinance contains specific anti-deferral provisions attributing the income of a controlled foreign company to its Pakistani resident shareholders in defined circumstances — broadly where the foreign entity is controlled by Pakistani residents, is resident in a low-tax jurisdiction, and derives predominantly passive income — subject to de minimis and active-business exclusions. Documentation of the foreign entity's activities and tax position is required to support any exclusion claimed.

2.9 Transfer pricing

Related-party transactions must be conducted on an arm's-length basis under transfer pricing rules aligned with OECD methodology, with documentation (master file and local file) required above prescribed thresholds and country-by-country reporting obligations applicable to Pakistani-parented multinational groups above the standard consolidated revenue threshold. The FBR has increased transfer pricing audit capacity in recent years, with particular scrutiny of related-party royalty, management fee and intra-group financing arrangements.

2.10 Incentives

Small companies (broadly, private companies meeting turnover, paid-up-capital and employee-count thresholds and not formed by splitting an existing business) benefit from the reduced 20% CIT rate described in section 2.1. Small and medium enterprises engaged in manufacturing, with turnover not exceeding PKR 250 million, may elect a two-category presumptive regime taxed at 7.5% or 15% of taxable income (or, under the final tax regime option, 0.25% or 0.5% of gross turnover) depending on turnover band, with the election irrevocable for three tax years and exemption from minimum tax on turnover and from standard tax audit. Export-of-services income remains eligible for the 1% (or 0.25% for qualifying IT/ITeS exporters registered with the Pakistan Software Export Board, through tax year 2026) final tax regime described in section 2.11, and equity investment in specified sectors can attract a 100% tax credit excluded from the ACT base.

2.11 Special regimes: exports, builders, digital transactions and permanent establishments

Export of goods was historically subject to a final tax regime in which 1% withholding on export proceeds discharged the exporter's full tax liability; Finance Act, 2024 converted this into a minimum tax, requiring exporters to compute normal taxable income and pay any excess over the 1% withheld, while also exposing them to super tax. Export of services remains under the final tax regime at 1% (0.25% for qualifying IT/ITeS exporters), with an irrevocable option to elect the normal tax regime instead. Builders and developers are taxed on a presumptive basis as a percentage of gross receipts — 10% of taxable profits for construction and sale of buildings, 15% for development and sale of plots, and 12% where both activities are combined. A new e-commerce withholding tax applies from Finance Act, 2025 at 1% (digital/banking payment) or 2% (cash on delivery) of gross payment for digitally ordered goods and services delivered within Pakistan, collected by payment intermediaries and courier service providers as final discharge of the seller's liability (doubled for inactive taxpayers). Permanent establishments of non-residents face minimum tax on gross receipts from the sale of goods (5%), services (15%, or 8% for a defined list of specified services including transport, freight forwarding, security, software development and engineering services, and 4% for IT/ITeS), and execution of contracts (8%), in addition to the 1.25% minimum tax on turnover and disallowance of head-office financing costs described in section 2.5.

3.1 Residence and rates

An individual is resident in Pakistan for a tax year if present in Pakistan for 183 days or more in that year, or meets other statutory presence tests linked to government service or prior-year residence. Resident individuals are taxed on worldwide income; non-residents on Pakistan-source income only. Salaried and business income of resident individuals is taxed under a progressive annual schedule with an exempt threshold followed by increasing marginal rates up to a top rate in the mid-30s percent range, with a separate (generally higher-banded) schedule applicable to non-salaried business individuals and associations of persons.

3.2 Capital income and real estate

Capital gains on disposal of securities listed on the Pakistan Stock Exchange are taxed under a specific schedule with rates varying by holding period, generally taxed more favourably the longer the security is held, and gains on specified listed securities are excluded from the ACT base described in section 2.3. Gains on immovable property are taxed under a holding-period-linked schedule, with reduced effective rates for property held longer and full taxation for short-holding-period dispositions, alongside withholding tax collected at the time of registration of the transfer. Dividend income is generally subject to final withholding tax at source, with the rate varying depending on whether the distributing company is itself subject to normal tax, exempt, or a specified categories such as mutual funds and independent power producers.

3.3 Social security and payroll

Employers and employees contribute to province-specific social security and employees' old-age benefit schemes, with contribution rates and wage ceilings varying by province following the devolution of labour matters; employers additionally fund workers' welfare and workers' profit participation fund contributions calculated on taxable profits above prescribed thresholds. Employers withhold income tax monthly from employee salaries based on projected annual salary income, reconciled through the employee's annual return, and separately withhold and remit applicable provincial sales tax on services where the employer itself is a services provider.

3.4 Inbound individuals

There is no general net wealth tax or federal inheritance tax in Pakistan; gifts and inheritances between specified close relatives are generally outside the scope of income tax, though gifts from non-relatives may be treated as taxable income of the recipient absent an adequate explanation of source. Pakistan does not operate a distinct preferential inbound-expatriate tax regime; foreign nationals working in Pakistan are taxed under the ordinary residence rules from the point residency is established, with relief available under an applicable double tax treaty and a foreign tax credit mechanism for foreign-source income also taxed abroad, limited to the Pakistani tax otherwise due on the same income.

Pakistan applies an extensive withholding tax system covering dividends, interest (profit on debt), royalties, technical and management service fees, contract payments, and the sale of goods, with many of these withholdings operating as minimum or final taxes rather than mere advance payments, particularly for non-active taxpayers who face rates enhanced by up to 100%. Pakistan's treaty network extends to more than 65 jurisdictions, generally reducing dividend withholding to a range of roughly 10–20% and royalty and technical-fee withholding to a range of roughly 10–15%, subject to beneficial-ownership and limitation-on-benefits conditions and to the domestic active-taxpayer-list mechanism that governs enhanced default rates.

Non-filers and taxpayers absent from the FBR's active taxpayer list face withholding rates enhanced by up to 100% across most categories, creating a strong compliance incentive independent of treaty status. Treaty relief at source requires a valid certificate of residence and, in many cases, prior approval or registration with the FBR; absent that documentation, domestic rates (including any non-filer enhancement) apply and excess withholding must be recovered by refund claim.

5.1 General anti-abuse and transactions with non-residents

The Income Tax Ordinance contains general anti-avoidance provisions permitting the Commissioner to disregard transactions or arrangements entered into or carried out for the purpose of tax avoidance and to reconstruct them on an arm's-length or economically substantive basis. Cohesive business operations undertaken by non-residents and their affiliates — overall arrangements for the supply of goods, installation, construction, assembly and supervisory activities, including offshore supply — are treated as generating Pakistan-source income, with a reduced effective withholding of 1.4% available on Commissioner approval for qualifying cohesive-operation payments (1% for certain offshore supply contracts to independent power producers in Azad Jammu and Kashmir).

5.2 Active taxpayer list and information exchange

The FBR maintains an Active Taxpayer List; inclusion is generally conditioned on timely filing of returns, and exclusion triggers the enhanced (up to 100% higher) withholding rates referenced throughout this handbook, functioning as a significant compliance-enforcement lever distinct from conventional anti-avoidance doctrine. Pakistan participates in international exchange-of-information arrangements, including under its tax treaty network and multilateral instruments, supporting FBR verification of offshore assets and income of Pakistani residents.

6.1 Sales tax and federal excise

Sales tax on goods is levied under the Sales Tax Act, 1990 at a standard rate of 18% on the supply and import of taxable goods, with reduced rates and exemptions for specified categories (basic foodstuffs, certain agricultural inputs, and other statutorily listed items) and higher rates for some goods such as specified retail and steel-sector supplies. Sales tax on services is a provincial subject, administered separately by each province (and by the federal capital) at rates generally in the range of 13–16% depending on the service category and province, creating a bifurcated indirect-tax compliance obligation for services businesses operating across multiple provinces. Federal excise duty applies to specified goods and services, including cigarettes, beverages, cement and certain financial services, at rates that vary by category and are adjusted frequently through Finance Acts.

6.2 Other taxes

Capital value tax applies in some provinces to the acquisition of specified assets, including immovable property, at rates set by provincial legislation. Stamp duty applies to the registration of property transfers and various commercial instruments at rates set by provincial stamp Acts. There is no general net wealth tax, though a one-off deemed-income tax on certain unproductive or underutilised immovable property has been introduced in past Finance Acts and could recur in future fiscal measures. Workers' welfare fund and workers' profit participation fund contributions, described in section 3.3, function as quasi-tax obligations on corporate profits above prescribed thresholds.

7.1 Filing, assessment and audit

The tax year for most taxpayers is 1 July to 30 June (though companies may seek approval for a special accounting year aligned with their business cycle). Corporate income tax returns are filed electronically with the FBR via the IRIS portal, generally by 31 December following the close of the standard 30 June tax year (30 September applies only where the company's tax year ends between 1 July and 31 December, and any extension granted), with advance tax payable in quarterly instalments during the year based on the greater of the current or prior-year projected liability. The FBR conducts risk-based audits and may issue amended assessments following an audit; the general limitation period for amendment of an assessment is five years from the end of the tax year in which the original assessment was issued (extended in cases involving concealment).

7.2 Rulings, appeals and penalties

Taxpayers may seek advance rulings from the FBR on specific matters, and separately, non-residents may apply to the Board for an advance ruling on the tax consequences of a proposed transaction. Assessments may be challenged first before the Commissioner (Appeals), then the Appellate Tribunal Inland Revenue, and ultimately the High Court and Supreme Court on questions of law; alternative dispute resolution through committees constituted under the Ordinance is also available for expediting resolution of pending disputes. Penalties for late filing, concealment of income and other defaults are calculated as a percentage of tax involved (or fixed amounts for procedural defaults), with default surcharge (statutory interest) also accruing on unpaid tax.

Because Finance Acts frequently adjust specific due dates and grant blanket extensions close to filing deadlines, taxpayers should confirm the current-year FBR circular or notification for exact dates rather than relying solely on the statutory default dates summarised above.

9.1 Entity choice

The private and public limited company, incorporated under the Companies Act, 2017 and registered with the Securities and Exchange Commission of Pakistan, is the standard vehicle for foreign investment, offering limited liability and standard 29% CIT treatment (20% if qualifying as a small company). Branches of foreign companies are permitted for specific licensed activities (subject to State Bank of Pakistan and Board of Investment approval) and are taxed on Pakistan-source attributable income at company rates, with the head-office-financing interest disallowance in section 2.5 a material consideration for branch structuring. Limited liability partnerships are also available but are less commonly used for inbound investment than the company form.

9.2 Structuring and incentives

Groups should evaluate small-company or SME presumptive-regime eligibility under section 2.10 where turnover and structure permit, given the materially lower effective rates available. Export-oriented service businesses, particularly in IT and IT-enabled services, should confirm registration with the Pakistan Software Export Board to access the preferential 0.25% final-tax rate on export proceeds through tax year 2026. Because minimum tax on turnover, the ACT, and super tax all operate as parallel floors alongside ordinary CIT, effective-rate modelling should compute all four mechanisms and identify which is binding for the specific fact pattern, since the highest of the applicable floors (not simply the ordinary CIT computation) will determine the actual liability.

9.3 Worked effective-rate illustration

A Pakistani manufacturing company (not a small company) has turnover of PKR 2,000,000,000, accounting income of PKR 280,000,000, and taxable income after tax adjustments of PKR 260,000,000. Ordinary CIT at 29% on PKR 260,000,000 is PKR 75,400,000. Minimum tax on turnover at 1.25% of PKR 2,000,000,000 is PKR 25,000,000 — lower than ordinary CIT, so it does not bind. Under the ACT, 17% of accounting income of PKR 280,000,000 is PKR 47,600,000 — also lower than ordinary CIT of PKR 75,400,000, so the ACT does not bind either. Super tax applies on income exceeding PKR 500 million at the top slab, but this company's PKR 260,000,000 income falls below the lowest PKR 150 million–200 million super tax band's upper bound plus subsequent bands, so at PKR 260,000,000 the applicable slab rate is 3.5% (the PKR 250 million–300 million band), giving super tax of PKR 9,100,000. Total tax payable is 75,400,000 (CIT, the binding floor among CIT/turnover-tax/ACT) + 9,100,000 (super tax) = PKR 84,500,000, an effective rate of 84,500,000 / 260,000,000 = 32.5% on taxable income.

9.4 Compliance

Expect monthly federal sales tax and separate provincial sales-tax-on-services compliance, biannual withholding tax statements, quarterly advance tax instalments, an annual CIT return with parallel computation of minimum tax on turnover and the ACT, and active-taxpayer-list maintenance to avoid enhanced withholding rates. Businesses with cross-border related-party dealings should maintain contemporaneous transfer pricing documentation, and export-of-goods businesses should model both the 1% minimum-tax withholding and the normal-tax-regime computation now required following the Finance Act, 2024 amendment described in section 2.11.