Tax Free Living in Pakistan

Society Pakistan & World Affairs
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Re: Tax Free Living in Pakistan

kakaballi, admit your defeat. Your argument has more holes than Swiss cheese. For corporations, there's corporate tax. Any income/salary/divident paid to an employee/shareholder/director is personal income to that person, and is taxable.

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http://www.google.com/hostednews/ap/article/ALeqM5hdiUNwI8fLEsRtE8NrwkcyLRBrUQD9IA13N80

Donors want Pakistan to tax rich to pay for floods
By SEBASTIAN ABBOT (AP) – 4 hours ago
KARACHI, Pakistan — Pakistan’s plea for billions of dollars to recover from this summer’s floods has sparked pressure on the country to reform a tax system that collects very little money, even from the rich.
The country’s biggest donor, the United States, has issued one of the strongest warnings, saying the world will only be able to fund a quarter of the tens of billions of dollars it will take to rebuild — and it will be difficult to get American taxpayers to help if Pakistanis aren’t footing their share of the bill.
But many economists fear the threats are hollow and the U.S. and others will once again bail out Pakistan without insisting on necessary economic reforms because the nuclear-armed country is so important in the war against al-Qaida and the Taliban.
“Pakistan can say, ‘If you don’t help us, the economy crumbles, the Taliban takes over and there goes your war on terror,’” said Akbar Zaidi, an economist who recently published a report on Pakistan’s tax system for the Carnegie Endowment for International Peace. “They don’t want to alienate the government, so they will let them off the hook.”
Despite years of international pressure, Pakistan has one of the lowest effective tax rates in the world, equal to about 9 percent of the value of the country’s economy, according to the Carnegie report. In contrast, the U.S. equivalent is more than three times as high at about 28 percent.
One of the reasons Pakistan’s rate is so low is because many people avoid paying taxes. Fewer than 2 percent of the country’s 175 million citizens pay any income tax, according to the report.
Also, some sectors of the economy like agriculture — a major money maker for the elite — are totally exempt from tax, and the rich have pushed to keep it that way.
“A small elite comprised of the military, land owners, and the rising urban upper and middle classes, is loath to give up any of its wealth (some of which is illegally accumulated),” said the report.
Ishrat Hussain, former head of the Pakistan central bank, estimated that better enforcement of current tax policies and the elimination of key exemptions should produce an effective tax rate of 15 percent — generating nearly $10 billion in additional revenue per year.
That money would go a long way toward repairing devastation from the floods, which affected more than 18 million people and damaged and destroyed over 1.8 million homes. It would also provide the money necessary to begin fixing Pakistan’s crumbling school system and health infrastructure.
“This is a time we have to tell people that we have to all pitch in and mobilize our own resources,” said Hussain. “Why should the international community come to your rescue if you are not doing your part of the bargain?”
He said donors should keep up the pressure on Pakistan, but advised against directly linking reconstruction money to tax reform, predicting the move could backfire in a country where animosity toward the West, and the U.S. in particular, is extremely high.
“It wouldn’t be a very smart move because people here would consider this as an intrusion on their sovereignty, and the debate would then be muddied,” said Hussain.
The U.S. and other countries have donated around $1 billion for emergency relief, and international financial institutions have provided about $2.5 billion in emergency loans. Donors are scheduled to meet in New York this weekend to discuss raising additional aid.
Washington has promised more money for reconstruction, but the U.S. special envoy to Pakistan, Richard Holbrooke, warned during a visit to the country this week that the international community could only fund about 25 percent of the bill. He said the U.S. would not condition reconstruction money on tax reform, but cautioned that American generosity has its limits.
“I don’t want to withhold money they need, but I think we have to be clear that the Congress is going to be reluctant to give money if the money is filling in a gap because people are not paying taxes,” he said.
Earlier this month, the International Monetary Fund held back more than $1 billion of funding because Pakistan had not met a number of economic criteria, including reforming its tax system. The money is part of a multibillion loan Pakistan took out in 2008 to stabilize its economy.
It’s unclear if the IMF’s tough stance will last. The organization has provided funding to Pakistan in the past when it didn’t meet its loan criteria — a move that some Pakistani economists believe was driven by international pressure because of Pakistan’s strategic importance.
Pakistan had promised the IMF it would introduce a new tax scheme in July — moving from a general sales tax to a value added tax — but ended up delaying it until the beginning of October because of disagreements between the central government and the provinces, especially Sindh province.
Kaiser Bengali, a senior adviser to the Sindh chief minister who is responsible for negotiating the tax deal with Islamabad, said it seems unlikely that the government will be able to reconcile its differences with the province by the revised deadline.
“I wouldn’t do things simply because the donors are asking me to do it,” said Bengali.
If Pakistan does not reform its tax system and the donors fail to bail the country out, it is unclear how the nation would come up with the money necessary for reconstruction. The government has proposed a one-time tax on urban property and agricultural land not affected by the floods, but it is uncertain whether it will be implemented and how much money it would produce.
Hussain, the former central bank chief, said that even if the one-time tax was implemented, he was worried the elite would simply use their influence to avoid paying anything as they have done in the past.
“The system has given power to the thieves to monitor themselves,” he said.
Associated Press Writers Ashraf Khan in Karachi and Asif Shahzad in Islamabad contributed to this report.

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Re: Tax Free Living in Pakistan

If you are really paying tax on profit from your business and your business is paying tax on the same and you do not get credit for either your tax payment or tax paid by business, time to fire your consultant. :S If your business is incorporated, then only the business will pay income tax and not you. There would be a deduction of 10% income tax if you receive dividends from your company. If your business is sole proprietorship, then only you would pay the tax. If the business is a partnership, then the partnership would pay tax (if registered with FBR) and you would only pay the difference in tax if your individual tax rate is higher than the firm's tax rate.

I do know corporate tax (as understood in US) is different from personal tax but either the 'person' pays the tax on profit (if it is a partnership/sole proprietership) or the business pays (if the business is incorporated). BOTH DO NOT PAY.

BTW, there is NOTHING called 'corporate tax' in Pakistan.

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Re: Tax Free Living in Pakistan

It is taxable but is deducted at source. If I get dividend/salary from a corporation, it is already taxed at source BY the business.

Your argument is like if I get my salary from my company and tax is already deducted by my employer (and it will if be if it is an incorporated business), I will have to pay it again to the tax authorities. ABSURD.

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Re: Tax Free Living in Pakistan

Tax deductible at source is a sort of pre payed tax... adjustable towards the final tax liability. Some taxes deducted at source are minimum tax liability for that revenue realized, irrespective of the profit.. and in some cases but not necessarily a final discharge of tax liability..

For example I earn salary, dividend, and business income. Tax deducted at source from my salary/dividend can not be adjusted towards my business income. However my personal tax liability will be tax for salary earned + tax for dividend earned + tax payable on business income.

Take for example I am doing import business which is the sole business I am doing. I can adjust the tax deposited at import stage against my final tax liability if the tax on profit is more than the pre payed tax... however tax deposited at import stage is the minimum tax liability for the import operation.

I hope the terminology I have used is not too technical for you... if there is any thing you don't understand I can elaborate further. i have tried to keep it as simple as I can..!!!

Just remember tax deducted at source is just a pre payment, not necessarily your final discharge of liability.

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Re: Tax Free Living in Pakistan

^ True, and if salary I receive is my only source of income, the tax already deducted would be my final liability and I won't have to pay anything else, right?

Or, if I am doing a partnership business and the business pays normal (not on import or minimum on sales), income tax, and that is my only source of income, I do not have to pay anything else, right?

If I am a shareholder of an incorporated business, and that company pays income tax, I do not have to pay any tax for the profits earned by the corporation, right?

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Re: Tax Free Living in Pakistan

In most of the cases yes but not necessarily... Pre payed taxes can be adjusted towards your final tax liability but theoretically is not final discharge of your liability. Example: Tax officer can add back some of the expenses/perks you have recieved as your income..!!!

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Re: Tax Free Living in Pakistan

Company's tax liability is not your personal liability.. However you will have to pay tax on dividends distributed by the company as your personal tax liability. In addition to this a tax officer may add back some perks/allowances you might be getting from the company as your personal income for which you are liable to pay tax.

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Re: Tax Free Living in Pakistan

^ I thought the company would pay tax on those disallowed perks/allowances and not me.

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No, allowances/perks disallowed by tax officer as company expense automatically become your personal income for which you are liable to pay tax.

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Re: Tax Free Living in Pakistan

^ except for 'disallowed perks' and in case company does not give any dividends, whatever I said in post #26 is correct then?

Please confirm the 'disallowed perks' thing as well. As far as I can remember, if the employer did not deduct tax from allowances or perks that could be considered my salary, it is the employer's fault and employer is going to pay tax on it (because it would not be considered 'business expense' and the profit would increase by that amount). If the only source of my income is salary, it is employer's liability to deduct tax on it. As far as I am concerned, I don't even have to file a return in most cases (S.169).

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Re: Tax Free Living in Pakistan

Not necessarily KB... It was just one example I quoted. I can give you several examples..

Just remember a thumb rule... Tex deducted at source (pre payed tax) is never your final discharge of tax liability unless and until specified by a specific notification.. example:

1) For any export income tax deducted at source is final discharge of liability because of section 144 (B) of the income tax law. Even if your tax liability is higher than the pre payed tax, the tax deducted at source will be considered as final discharge of liability. If tomorrow government withdraws 144 (B), pre payed tax will be adjustable towards final discharge of liability but will not be the actual final discharge of liability.

The same pre payed tax on export can not be adjusted towards the profit earned on local sales of the same company even in the presence of 144 (B)..

If I made a loss on export operation and a profit on local sales... I can not adjust this pre payed tax towards my tax liability on local sales as the pre payed tax is also my minimum tax liability on export operation..!!!

2) Tax deducted at source on imports is not final discharge of liability because of the absence of a specific notification like 144 (B). Therefore the amount of pre payed tax in imports is adjustable towards final liability, but by no means is final discharge of liability...!!!

3) In case of salary pre payed tax is not a final discharge of liability. Example: If the employer has for some reason mis calculated your final tax liability. In this case even if your perks/allowances are not added back, you will have to pay the remainder of your liability..

However tax deducted at source on dividend is final discharge of liability because of a specific notification for this specific income...

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Re: Tax Free Living in Pakistan

^ I am sorry, but you are again talking about exceptions. Tax deducted on imports or exports is NOT INCOME tax. It is, as you said some sort of prepaid tax. Income tax is what you pay/declare with your annual return.

I am talking about final income tax paid by the corporation and I, as a shareholder, does not have to pay anything on profits (not dividends) of the company I am a shareholder of. Is that correct?

Genearlly, no mistakes by my employer or disallowed perks, I am not liable to pay any other tax if salary is my only source of income. Is that correct? :D

If my source of income is a business, and that business paid INCOME tax (as per the laws), I do not have to pay any other INCOME tax. Is that correct? :)

If Nawaz Sharif's only source of income is dividends received from his companies, does he have to pay any other Income tax?

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Re: Tax Free Living in Pakistan

There are four kind of federal taxes, income tax, sales tax, custom duties, excise tax. For example at import stage you pay custom duty, sales tax, and income tax. It is this income tax which is deducted at source, and it goes in the tax return of the company.

It may sound absurd to you but the biggest income tax collection in pakistan is at import stage. In Pakistan we pay income tax while paying our electricity bills even. All these income tax pre payments are adjustable against final discharge of income tax liability.

All the above examples I quoted to you are for income tax, and no other tax.

Believe me KB I have been talking about income tax only in all the above posts without realizing that you were mixing it up with other federal taxes.

[quote]
I am talking about final income tax paid by the corporation and I, as a shareholder, does not have to pay anything on profits (not dividends) of the company I am a shareholder of. Is that correct?
[/quote]

You are absolutely correct that you are not liable for the company as a share holder. Company has to pay tax on their own operations without any liability on the share holders. However you are liable when company distributes money to the share holders in the shape of dividend, salary, or perks..

[quote]
Generally, no mistakes by my employer or disallowed perks, I am not liable to pay any other tax if salary is my only source of income. Is that correct? :D
[/quote]

You are liable for your own income in what ever shape. Your employer is merely a collection tool on behalf of the government in this case. Eventual responsibility of your personal taxes fall on you not your employer under any circumstances, except for this that the employer fails to collect the tax from you..

[quote]
If my source of income is a business, and that business paid INCOME tax (as per the laws), I do not have to pay any other INCOME tax. Is that correct? :)
[/quote]

yes you will pay again when that profit is distributed as dividend.. or any other shape.

[quote]
If Nawaz Sharif's only source of income is dividends received from his companies, does he have to pay any other Income tax?
[/QUOTE]

If he has received dividends from his companies, it will be always reflected as tax payed by him personally. As it is not the case, it shows that either his companies have not payed any dividend, or his companies have payed him through some illegal means as his life style is not justified with his declared income. In this case I am presuming he does not have any illegal or black money from some illegal source such as kick backs and bribes.

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Re: Tax Free Living in Pakistan

Not saying that Nawaz Sharif is not evading taxes. Obviously, one wouldn't pay taxes on illegal or black money.

Just saying that if he claims his only source of income as dividends or salaries from his companies, he does not have to PAY income tax with annual return. The annual return should show the amount of tax already deducted from dividends or salaries but no cash payment with the annual return is required. If he does not PAY any tax in cash with the return, is does not mean he did not pay any tax during the year.

Is that right?

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Re: Tax Free Living in Pakistan

Kaka: Think and do not become fooled by Nawaz Thug’s factory of lies (unless you are part of that factory). You should know that if tax is deducted at source by company then still it is not company that pays tax but it is taxpayer who pays tax and that tax is shown by tax office as tax paid by taxpayer not company.

Thus: All tax paid by ‘Nawaz Thug’ ... that is 'tax' deducted from dividend by company or any other 'income tax' directly by him ... would show in his tax return as 'income tax' paid by ‘Nawaz Thug’.

Example 1: if ‘Nawaz Thug’ works as ‘director’ or ‘employee’ for company ‘Thuggi and partners’ or even for ‘Government’ and tax is deducted from his earning at source then tax office record would show that deducted tax is paid by ‘Nawaz Thug’ as 'Income tax' and not company ‘Thuggi and partners’ or Government’.

Example 2: If ‘Nawaz Thug’ has private business (not limited company) then in such case all profit of that business would be taxable as income of ‘Nawaz Thug’. In such case tax office record would show ‘Nawaz Thug’ paying tax on those profits and not company. For instance, owner of shop, thela wala, plumber, etc ... all are doing business and profit of that business is considered as income of the owner, so owner pays 'income tax' on all profits).

Example 3: If ‘Nawaz Thug’ has public limited company (as Nawaz thugs has) then in such case, company would be considered as independent entity and would pay tax on their profits (that tax is call corporate tax). Anyhow, if after paying corporate tax, company decides to give any money to ‘Nawaz Thug’ then that payment is called dividend. That dividend can be paid by company in two ways, after deducting tax or gross. Since in Pakistan, dividends are paid after deducting tax then let discuss that.

If company pays dividend after deducting tax at source (as happen in Pakistan) then still that dividend is taxable. Only difference is that, when ‘Nawaz Thug’ would file tax return to tax office (I mean, if he does), ‘Nawaz Thug’ would show dividend plus ‘deducted tax’ as his income (that would be gross dividend income of Nawaz Thug). If ‘Nawaz Thug’ gross income (that includes gross dividend income) takes him to higher tax rate than ‘Nawaz Thug’ would be paying extra tax ... that is, total tax liable on his gross income minus tax already deducted at source by company. Nevertheless, tax office record would show tax deducted by company at source (on dividends) plus any extra tax ‘Nawaz Thug’ paid to tax office as 'income tax' paid by ‘Nawaz Thug’.

So, if tax office shows that ‘Nawaz Thug’ paid Rs ‘0’ income tax in any year then that means, his total income (including dividend income) for that tax year was such that he was not liable to pay any tax that year. Anyhow, if tax office shows that ‘Nawaz Thug’ paid Rs 5000 income tax in tax year then that means ‘Nawaz Thug’ total income (including dividend income) was such that he was liable for only Rs 5000 'income tax' that year.

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Re: Tax Free Living in Pakistan

If he has paid taxes on dividends, salaries from his companies it would reflect in his tax return. His tax return does not show any of these prepaid/post paid taxes. It doesn't matter if the tax was deducted at source or post paid...

KB, it's very difficult to defend our leaders as far as their financial matters are concerned.

Same is the case with Zardari. He has proven bank accounts with over billion dollars with no known source of income where the tax was paid any where in the world.

In any other country tax authorities would ask both these individuals together with their families to provide the source of income and record of the tax paid may be any where in the world. Here it would be called political victimization..

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Re: Tax Free Living in Pakistan

Saleem bhai… kya haal hain? :wave:

Chorain Saleem bhai… yeh Nawaz thug… na tax deta hai… na bhatta… kuch kerna perna hai iss ka.

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Re: Tax Free Living in Pakistan

@Saleem bhai, would you comment any known source of income for Altaf bhai, his life syle, and the amount of tax paid by him.. nawaz thug is not the only thug in the world..
I will be interesting to know if AH has any known legitimate source of income.. I was wondering how does he pay his phone bills!!!!
Somebody was saying Altaf has never paid a single paisa tax in pakistan, and never had a legitimate source of income at least in Pakistan from the time he was born.. Saleem bhai I am sure you might be knowing better.. would you care to enlighten the forum..!!!

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Re: Tax Free Living in Pakistan

Well kaka:) ... In above post, you are right that tax on export/import is not income tax ... anyhow:

Income tax is total tax an individual pays on income. Source of that income is immaterial. Dividend income is also income and a person has to pay tax on that income just like earned income or investment income (agricultural income should be there too, though in Pakistan that income is exempt from tax).

In tax office record also, it is immaterial where that person got income and how he paid tax on those income ... paid to tax office through employer as employer deducted tax from his salary, paid to tax office through company because company deducted tax from dividend, paid directly to tax office because person received that income gross directly from wherever (like rent on property, private company profit, shops profit, earnings paid in hand, etc). As for tax office record, all tax paid by an individual on income (by whatever mean) is shown as ‘income tax’ paid by that person.

 Tax office record would not show income tax paid by a person in his name (dividend income or tax paid on bank interest) only if that person is not registered as tax payer.