Karachi, June 1, 2025 – The Institute of Chartered Accountants of Pakistan (ICAP) has proposed the introduction of a structured withholding tax (WHT) mechanism on royalty payments made to resident individuals and entities.
The proposal forms part of ICAP’s detailed recommendations for the upcoming budget 2025–26.
Currently, royalty payments made to non-residents are subject to withholding tax under Pakistan’s tax laws. However, no such withholding tax framework exists for royalty payments to local individuals or businesses. ICAP highlighted this gap in the tax system, stating that the absence of a similar mechanism for residents results in inconsistent and inequitable treatment of taxpayers. To address this, ICAP has suggested that the withholding tax regime be extended to cover domestic royalty recipients, ensuring parity in tax policy for both local and foreign beneficiaries.
ICAP emphasized that income earned from royalty—which typically stems from intellectual property rights, patents, trademarks, and licensing agreements—is often underreported. Due to its intangible nature and reliance on voluntary disclosure, much of this income can escape proper taxation. A withholding tax applied at the source, as recommended, would ensure better tax compliance and transparency.
The institute outlined several benefits of introducing such a measure:
• It would facilitate tax collection at the point of payment, reducing dependence on post-filing disclosures.
• It would discourage tax evasion by holding the payer responsible for initial tax deduction.
• It would broaden the tax base by including income that often remains undocumented.
• It would promote fairness by aligning the tax treatment of royalty income regardless of the recipient’s residency status.
ICAP further noted that the proposed measure aligns with global tax standards, where withholding tax on royalty payments is commonly practiced. By adopting this reform, Pakistan would modernize its taxation of intellectual property income and move towards a more equitable and robust tax system. The institute strongly urged the government to incorporate this recommendation in the forthcoming budget, as it would enhance revenue mobilization while promoting responsible reporting practices.