Understanding Business Taxes in Pakistan: A Beginner’s Guide

In all the excitement of setting up a small business, paying taxes may be the last thing on your mind. New premises, new staff, and new horizons are all clamoring for your attention. But if you refer to your business plan, you’ll know that complying with business regulations and paying tax are important elements in running a successful small business, and knowing what to expect will help you budget realistically and avoid nasty surprises. This beginner’s guide should put you in the picture.

Business tax planning in Pakistan

It’s critical for new and expanding businesses to understand the regulatory and tax framework within which they operate. As soon as your company starts to generate income, you’ll become liable for corporate tax. This will need to be paid on income coming from both Pakistan and abroad, on income derived from your core business activities, property rental and any capital gains you realize on business assets.

There are a number of schemes to incentivize tax compliance, and as a small business, you might qualify for reduced tax rates. Export businesses and companies operating in Special Economic Zones can also benefit from lower rates, while manufacturing and technology companies may further qualify for reduced taxation schemes. If you’re unsure of whether you qualify for any tax scheme or incentive, speak to your accountant as early as possible. 

Paying corporation tax in Pakistan

Business tax planning in Pakistan can seem complex for a small business owner if you’ve never had to deal with it before. There are different tax rates and regulations applicable to different categories of small and medium-sized businesses. Manufacturers, traders, startups and service providers have variable tax obligations and benefits – and you can find out more about these using the SME Development Authority’s Income Tax Law Matrix. This provides clear guidance on compliance requirements, and highlights where savings can be made.

Pakistan’s standard rate of corporation tax is currently 29%. However, certain small companies that have lower turnover and capital thresholds are only charged 20%. Resident companies are required to pay corporation tax on global income, while non-resident companies must only pay on income derived within Pakistan.

You will need to register your business with the Federal Board of Revenue’s online IRIS, or Integrated Revenue Information system. This will allow you to file your tax return and make payments on account in PKR. There is a requirement to pay tax in advance, via quarterly installments across the year. These are calculated on the basis of the previous year’s liability or on an estimate of your income for the current year. The final settlement is calculated when you file your annual return.

Making these regular revenue payments can be simplified by using a payment system such as Payoneer for business. It’s a smart, secure service that allows you to send and receive money within Pakistan or across borders, and it comes with a wide range of features and benefits.

How to pay sales tax as a small business

As well as corporate tax, you’ll need to know how to pay sales tax for a small business. This is the tax levied by the government and must be taken into account during small business tax planning for global e-commerce. This tax is levied on the sale and supply of goods either manufactured in or imported into Pakistan. Certain goods are exempt and information on this tax can be found on the Federal Board of Revenue website.

How to pay employees in a small business

As soon as you’re more than a one-man operation, you’ll need to learn how to pay staff in a small business, and the tax implications that come with this. When you calculate your monthly employee wages, you’ll need to know what allowances and deductions to make for each employee, including employee income tax and any employer-side contributions required from you. The best way to do this is to use a payment system such as Payoneer, which can handle wage payment, expense management, timesheet organization and much more — at competitive pricing.