Pakistan – Updates on tax base protection measures, sales tax and capital gains tax changes

Pakistan – Updates on tax base protection measures

KPMG in Pakistan provides briefings on the Pakistan government’s drive to broaden the tax base and increase in withholding tax rates for non-filers of tax returns, sales tax rate changes for petroleum products, and the imposition of tax on capital gains of non-resident institutional investors.

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Increasing the tax base

With the aim of enforcing tax return filing requirements and broadening the tax base, Pakistan’s government increased advance withholding tax rates in July 2014 for non-filers of tax returns – that is, persons who do not appear on Board of Revenue’s active taxpayers list. The enhanced rates are designed to encourage the filing of returns and are part of the government’s broader measures to increase Pakistan’s tax-to-GDP ratio.

 

The scope of enhanced tax rates was further broadened in February 2015 to include imports and services. Payments received by a non-filer company on account of services are now subject to enhanced withholding tax rate of 12 percent (rather than the 8 percent rate for filers).

Similarly, a non-corporate service provider is subject to a higher rate of 15 percent (rather than 10 percent).

The withholding tax rate on imports by non-filers is increased by 0.5 – 3.0 percent, depending on the importer’s legal status and the item imported. The tax withheld is adjustable against tax liability as per the importer’s return and refundable where no liability exists. 

Sales tax rate changes for petroleum products

Pakistan continues to change its sales tax rates on petroleum products to reflect fluctuating revenue collections due to the decline in international oil prices.

The sales tax rate on petroleum products rose to 22 percent (from 17 percent) in December 2014, and was further increased to 37 percent in February 2015 for high-speed diesel oil, but the rate was reduced to 18 percent for other products.

As of 1 May 2015, the rate on HSD was reduced to 34 percent and increased to 20 percent for other products. The business community has challenged the enhanced tax rates (compared to the general rate of 17 percent) before the High Court, whose decision is pending. The Board of Revenue has not been restricted in collecting the tax at the enhanced rates in the meantime. 

Foreign institutional investors subjected to capital gains tax

Due to a tax law amendment that took effect in July 2014, foreign institutional investors in Pakistan’s stock market are subject to the same tax regime on capital gains that applies for local investors and so they are subject to withholding of capital gains tax through National Clearing Company of Pakistan (NCCPL).

In line with this amendment, in February 2015, the Board of Revenue amended the related rules for computing and collecting capital gains tax to extend their ambit to foreign institutional investors. Going forward, capital gain on sale of securities in Pakistan stock market by such investors will be reported to NCCPL and the elated tax will be collected and deposited by NCCPL on the investor’s behalf.

No capital gains tax applies to listed shares held for more than 24 months. 

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