DOING BUSINESS IN PAKISTAN

Pakistan has various investment opportunities and they will increase with the passage of time, and will benefit foreign companies expanding their global business. Here are some of the reasons why:

  • Pakistan is ranked 6th in the world by population. Its population is over 200 million
  • The economy of Pakistan is the 24th largest in the world in terms pf purchasing power parity and 42nd largest in terms of nominal GDP. Size of the economy in 2017 is over 300 billion US dollars and expected to grow by 3-5% annually.
  • David M. Darst, Chief Investment Strategist of Morgan Stanley, said, that Pakistan is one of nine nations that will add another China in 35 years, Pakistan is located in a region that will bring major changes in the world economy in coming decades primarily due its demographics. His article published in The Express Tribune, January 28, 2015
  • Pakistan’s middle class is experiencing a rapid growth, which is evident from the rising demand for consumer durables, education and health. According to the State Bank of Pakistan, the size of Middle Class in 2018 is around 80 million.
  • There is also CPEC ( China Pakistan Economic Corridor ), which will be a game changer for Pakistan. It is over a 50 billion US dollar project being carried out in collaboration with China. A new city by the name GAWADAR is being built on the Arabian Sea coast in south western Pakistan, which will connect China and Central Asia with Arabian Sea, by roads, railways and oil pipelines. Most of China’s international trade will pass through it, which will be a booster for the Pakistan’s economy. GAWADAR has the World’s largest deep sea port and various industrial zones have also been planned.
  • Nearness to Middle Eastern and Asian Markets
  • Availability of Skilled and Cheap Labour force
  • English the international language of business, is the official language.

There is a strong current consumer demand in the following areas:

    • Electronic Goods
    • Telecommunication and Information Technology
    • Automobiles and related items
    • Housing and Infrastructure
    • Clothing
    • Household items
    • Restaurants and food processing
    • Education
    • Healthcare
    • Farming including dairy farming
    • Cattle breeding

AUDIT AND REGULATORY ENVIRONMENT

  • Companies Act 2017

The law requires companies to keep complete accounting records and to prepare financial statements for each financial year ( financial year ends on June 30, except in case of certain specific sectors) and have them audited by the auditors of the company. All Public Companies and Private Companies having paid up share capital more than Rupees 10 million, have to file audited financial statements with SECP. Private Companies having paid up share capital not exceeding Rupees 1 million, can file unaudited financial statements with SECP.

  • The financial reporting framework is as follows:
    • Listed and Large Sized Companies are required to follow International Financial Reporting Standards issued by IASB (International Accounting Standards Board) as adopted in Pakistan
    • Medium Sized companies are required to follow International Financial Reporting Standard for Small and Medium-Sized Entities issued by IASB as adopted in Pakistan
    • Small-Sized Companies are required to follow Revised Accounting and Financial Reporting Standard for Small-Sized Entities issued by the Institute of Chartered Accountants of Pakistan

A company will be small if it meets both of the two following conditions:

    • Annual turnover of Rs.100 million or less
    • Paid up capital of Rs.10 million or less

A company will be ‘medium-sized’, if it meets any one of the three following conditions:

    • Annual turnover greater than Rs.100 million but not more than Rs.1 billion
    • Paid up capital greater than Rs.10 million but not more than Rs.200 million
    • Number of employees not greater than 750.

INDUSTRY INCENTIVES

Exports

Duty Drawback and Rebate

On exports of various items, like cotton and leather garments, carpets, wooden furniture, surgical equipment, etc., duty drawback (that is a refund of import duties paid on raw materials which were previously imported and used in the manufacture or production of goods to be exported out of Pakistan) and export subsidy is paid by the Government. The goal is to encourage export production and stimulate foreign trade.

Export Financing

Finance is also provided to the exporters by the State Bank of Pakistan, through private banks, at cheap interest rates, for exports.

PRINCIPAL TAXES

The main business taxes that are levied in Pakistan are as follows:

Corporate Income Tax

  • Small Company @ 25% of taxable profit. Tax rate will reduce by 1% every year and after 2022 and onwards it will be 20%.
  • Other Companies @ 30% of taxable profit. Tax rate will reduce by 1% every year and after 2022 and onwards it will be 25%.
  • Minimum Tax @ 1.25% of the turnover, irrespective of losses
  • Minimum Tax @ 8 % of services revenue, if deducted at source

     A company under the Income Tax Law, is a small company if:

    • paid up capital plus undistributed reserves do not exceed Rs.50 million
    • employees do not exceed 250
    • annual turnover does not exceed Rs.250 million

Final Taxation

There is also a final tax regime, where tax deducted at source is considered as final tax charge and no tax refund is allowed. However such tax payers are exempted from giving particulars of their business expenses in their tax returns. Final tax regime applies to the following:

td>Tax Ratetd>1% of exportstd>4% of receiptstd>3% of import valuetd>7% of receiptstd>15% of receipts

  Tax Rate
Exporters 1% of exports
Supplier of goods, other than corporate
manufacturers and listed companies
4% of receipts
Commercial importers 3% of import value
Contractors other than listed companies 7% of receipts
Dividend 15% of receipts

 

The tax rates mentioned above are the main corporate tax rates, however there are tax rates applicable to other entities and transactions. Various concessions and rebates are also available in different situations.

The fiscal year in Pakistan runs from 1 July to 30 June each year. The last date for filing of corporate income tax returns is 31 December.

Any company making a taxable business loss can carry the loss forward for set off against future business income for the next 6 years. There is no any time limit for carrying forward unabsorbed tax depreciation, but it will be set off against 50% of next year’s income, and so on until completely set off. However losses cannot be carried back for set off. Excess of minimum tax on turnover over the tax calculated on taxable profit, can also be carried forward for set off against tax liability for the next 5 years.

Indirect Tax (Sales Tax)

  • Standard rates 14 - 19%
  • Reduced rates 5-10%

Sales tax on goods is a value added tax, that is ultimately levied on consumer expenditure. Businesses registered for sales tax must charge sales tax on their sales, but can recover the same which they have suffered themselves (such that the end consumer suffers the net cost). However there are situations where registered businesses cannot recover tax suffered by them. Sales Tax on goods is collected by the Federal Government and Sales Tax on services is collected by the Provincial Governments.