Complexity in law: the sectoral and transactional maze

The complexities are not limited to administration; they are deeply embedded in the tax law itself. The system has morphed from one based on universal income to a sectoral and transactional tax maze.

Consider the simple question a foreign client posed: “What is the income tax applicable on the service sector in Pakistan?”

A simple answer is impossible. The response requires a series of qualifying questions:

• Is the service rendered from outside or within Pakistan?

• Is the service provider a tax resident of a country with a Double Taxation Treaty (DTT)?

• If rendered within Pakistan, is it through an individual/sole proprietor, Partnership or a corporate person?

• If corporate person whether through a branch office or a local subsidiary?

• What is the nature of the service?

• What is the status of the recipient (e.g., are they a withholding agent which in itself is a series of qualifying questions in certain cases)?

Depending on the answers, the tax regime could involve different DTT rates (e.g. 10 percent, 12 percent, 15 percent), varying withholding rates (e.g., 4 percent, 6 percent, 8 percent, 15 percent), and different rates for non-corporates (based on slab rates) and corporate tax rates (for small vs. regular companies) besides having minimum tax on annual turnover and Alternative Corporate Tax based on accounting profits.

Simplification of Pakistan’s income tax system—I

There are various kinds of minimum taxes whilst some of which can be carried forward, some are not adjustable. In the end, a taxpayer’s liability is computed under various such basis, and he has to pay the highest of all amounts.

This was just one example within the services sector. If one keenly observes the provisions and structure of income tax law, it is........

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