Pakistani Income Tax
Our tax guide for freelance contractors working in Pakistan
Individuals are deemed to be resident for tax purposes and therefore taxable on their worldwide income in Pakistan if they stay in Pakistan for more than 182 days in a tax year (1 July to 30 June). If an individual is resident according to this rule, but stays in Pakistan purely for employment purposes, and remains in Pakistan for a period or a sum of periods of less than three years, the foreign-source income is exempt from taxes in Pakistan if it is neither received nor remitted into Pakistan by the individual. Furthermore, any foreign source salary of a resident individual shall not be taxed in Pakistan, if the resident has paid foreign income tax on that salary.
Non-residents are taxed on their Pakistan-source income only including income received or deemed to be received in Pakistan or deemed to accrue or arise in Pakistan. Income from salary is always considered to be Pakistan-source income if it is earned in Pakistan, regardless of where it is received.
Contributions to recognized pension funds by the employer are not considered to be taxable for the employee. Taxable income is the amount received by an employee from employment, whether of a revenue or capital nature. It includes leave pay, payment in lieu of leave, overtime, bonus, commission, fee, gratuities, work condition supplements, monetary and non-monetary perquisite, any allowance except that which is granted to meet expenses wholly and necessarily incurred in the performance of employee’s duties of employment, profits in lieu of or in addition to salary, pension, annuities, and tax reimbursement.
Employees may deduct the following expenses from their taxable income: expenses for medical costs up to the lesser amount of 10% of their income or PKR 30’000; certain charitable donations on the lower of donation value and 30% of the individual’s taxable income. Tax rates are progressive and range from 3.5% to 30% (for income over PKR 700’000 per year) and where the income of the individual from salary exceeds 50% of the taxable income. Regarding foreign-source income, residents can usually claim a tax credit of the lower of the average foreign tax paid or the average Pakistani tax payable. Pakistan has concluded a number of double tax treaties which exempt income from Pakistani tax under certain conditions.