Income Tax expense In Pakistan is calculated by applying the relevant tax rates to the taxable income of individuals or businesses for a given fiscal year. This calculation is critical for both salaried individuals and business entities, as it determines the amount of tax liability they owe to the Federal Board of Revenue (FBR). The process involves determining taxable income, applying deductions, considering exemptions, and using applicable tax rates.
1. Understanding Taxable Income
Taxable income forms the foundation for calculating income tax expense. It refers to the total income earned from all sources during a fiscal year, minus any allowable deductions or exemptions. For individuals, taxable income may include salaries, rental income, capital gains, business profits, and any other income streams. For businesses, taxable income generally consists of revenues from operations, adjusted for allowable business expenses, depreciation, and other relevant costs.
The first step in calculating income tax expense is identifying the taxpayer's total income. Once the income is determined, deductions and exemptions are applied to arrive at the taxable portion.
2. Deductions and Exemptions
Taxpayers are allowed to reduce their taxable income by claiming certain deductions and exemptions. These include:
Zakat contributions: Any amount paid as Zakat can be deducted from taxable income.
Charitable donations: Donations to approved charitable organizations are tax-deductible.
Investment in pension schemes: Investments in government-approved pension funds can provide relief.
Education and medical expenses: Under specific conditions, education expenses for children and medical costs can be claimed.
These deductions are subtracted from the total income, reducing the taxable income and, consequently, the overall tax expense.
3. Income Tax Rates for Individuals
Once taxable income is determined, the next step is to apply the relevant tax rate. For individuals, Pakistan follows a progressive tax system where different income brackets are taxed at increasing rates. The tax slabs for salaried and non-salaried individuals differ slightly.
a. Salaried Individuals (FY 2023-2024):
For the fiscal year 2023-2024, salaried individuals face the following progressive tax rates:
Up to PKR 600,000: No tax.
PKR 600,001 to PKR 1,200,000: 2.5% of the amount exceeding PKR 600,000.
PKR 1,200,001 to PKR 2,400,000: PKR 15,000 + 12.5% of the amount exceeding PKR 1,200,000.
PKR 2,400,001 to PKR 3,600,000: PKR 165,000 + 20% of the amount exceeding PKR 2,400,000.
PKR 3,600,001 to PKR 6,000,000: PKR 405,000 + 25% of the amount exceeding PKR 3,600,000.
Above PKR 6,000,000: PKR 1,005,000 + 35% of the amount exceeding PKR 6,000,000.
b. Non-Salaried Individuals:
For non-salaried individuals, the tax rates for the fiscal year 2023-2024 are slightly different, but they follow the same progressive structure. The tax rate ranges from 5% for income over PKR 600,000 to 35% for income above PKR 12,000,000.
4. Income Tax Rates for Businesses
For companies, Pakistan applies a flat corporate tax rate. The standard corporate tax rate for most businesses in the fiscal year 2023-2024 is 29%. However, specific industries, such as the banking sector, are subject to higher rates, with banks being taxed at 39%. Certain sectors, like small and medium enterprises (SMEs), may benefit from reduced rates under specific government incentives.
Businesses calculate their income Tax Calculator Pakistan expense by first determining their taxable income, which includes their gross revenue minus any business expenses, depreciation, and other allowable deductions. They then apply the applicable corporate tax rate to this taxable income to determine the tax expense.
5. Withholding Tax
Pakistan operates a withholding tax (WHT) system where taxes are deducted at the source on various types of income and financial transactions. For salaried individuals, WHT is deducted from their salary by their employer. For businesses, withholding tax may apply to payments such as dividends, imports, and contracts. This WHT is treated as an advance tax and is adjustable against the total income tax expense when the taxpayer files their tax returns.
6. Filing Tax Returns and Paying Income Tax
Both individuals and businesses in Pakistan are required to file annual income tax returns to report their taxable income and calculate their final tax liability. The tax return process allows taxpayers to reconcile the taxes already paid (such as withholding taxes) with their total income tax expense. If the taxpayer has paid more through withholding tax than their actual tax liability, they may be eligible for a refund.
Conclusion
In Pakistan, calculating income tax expense involves determining taxable income, applying deductions, and using progressive tax rates for individuals or flat rates for businesses. Hamza & Hamza Law Associates tax also plays a role in the tax calculation process, as it serves as an advance payment of tax that can be adjusted when filing returns. Proper tax compliance ensures that individuals and businesses meet their tax obligations while optimizing their tax liabilities through legal deductions and exemptions.
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