Benchmark framework distinguishes core features of Pakistan’s income tax system from tax expenditures and preferential concessions.
ISLAMABAD: The Federal Board of Revenue (FBR) has outlined Pakistan’s benchmark income tax framework under the Income Tax Ordinance, 2001, setting out the fundamental principles used to assess the country’s tax system. The framework defines the unit of taxation, tax base, benchmark tax rates, constitutional exemptions and other structural features that form the basis for measuring tax expenditures.
According to the FBR, the benchmark framework distinguishes the normal components of Pakistan’s income tax system from policy-driven tax expenditures, such as exemptions, concessions and preferential tax treatments.
Unit of Taxation
The FBR stated that the unit of taxation is the “person”, as defined under Section 2(42) of the Income Tax Ordinance, 2001.
The definition covers:
• Individuals
• Companies
• Associations of Persons (AOPs)
Each person is assessed separately on their taxable income in accordance with the provisions of the Ordinance.
Tax Year and Basis of Taxation
According to the Board, Pakistan’s tax year runs from July 1 to June 30.
Income is taxed on an accrual basis, meaning it becomes taxable when it is earned rather than when payment is received.
Tax Base
Under Section 9 of the Income Tax Ordinance, taxable income comprises earnings from all recognised sources, including:
• Salary
• Property
• Business
• Capital gains
• Other sources
The FBR further clarified that:
• Resident taxpayers are liable to tax on their worldwide income.
• Non-resident taxpayers are taxed only on income derived from sources within Pakistan.
Benchmark Income Tax Rates
The benchmark tax rates are the statutory rates prescribed in Schedule I of the Income Tax Ordinance, 2001.
According to the FBR, the benchmark framework incorporates:
• An average effective income tax rate of 24.5% for non-banking corporate entities.
• An average effective income tax rate of 39% for banking companies.
The Board noted that variations in tax rates contained within Schedule I are regarded as integral elements of the benchmark tax system rather than tax expenditures.
Government Income Exemptions
The FBR explained that Section 49 exempts the income of the Federal Government from income tax.
Similarly, the income of provincial and local governments is exempt, except where it is generated through business activities conducted outside their respective jurisdictions.
According to the Board, these exemptions arise from the constitutional framework and therefore form part of the benchmark tax system instead of being treated as tax expenditures.
Double Taxation Relief
The benchmark framework also includes provisions designed to prevent the same income from being taxed more than once.
These structural measures include:
• Foreign tax credits under Section 103.
• Exemption for inter-corporate dividends.
The FBR considers these provisions essential components of the income tax system rather than preferential tax concessions.
Constitutional Exclusions
The Board noted that certain exclusions from the federal tax base are mandated by the Constitution.
These include:
• Agricultural income, which falls outside the scope of federal income tax.
• Transitional tax treatment applicable to territories incorporated into the federal tax regime following constitutional amendments.
The FBR emphasised that these constitutional arrangements are not regarded as tax expenditures.
International Commitments
The benchmark framework also excludes tax exemptions arising from Pakistan’s international obligations, including those granted under:
• Diplomatic conventions.
• United Nations agreements.
• International development assistance agreements.
According to the FBR, these exemptions are required under international commitments and therefore do not constitute tax expenditures.
Loss Carry-Forward Provisions
The Board also treats the carry-forward and carry-back of tax losses as a normal feature of income measurement.
Accordingly, provisions allowing taxpayers to offset eligible losses against taxable income in previous or subsequent tax years are regarded as structural elements of the benchmark tax system.
Basis for Measuring Tax Expenditures
The FBR stated that the benchmark income tax framework provides the foundation for identifying and measuring tax expenditures in Pakistan. By distinguishing the standard features of the Income Tax Ordinance from policy-based exemptions, concessions and preferential treatments, the framework enables a more transparent assessment of the fiscal cost of tax incentives and supports the evaluation of Pakistan’s overall tax policy.