Taxation of Non-Residents under Income Tax Law of Pakistan

Abstract

Every enactment of law has some specific purpose. The present Income Tax Law of Pakistan, i.e. Income Tax Ordinance, 2001, herein after referred as ‘Ordinance’, was promulgated in Pakistan in 2002 with effect from 1st day of July 2002. Earlier the Income Tax matters, in this part of the world, were governed by the Income Tax Ordinance, 1979. Examining the intent of the legislature for the Income Tax Law, mens or sentential legis , the aim of enactment was/is to charge, levy and collect tax on income of persons all over Pakistan. Inclusively defining the terms “Income”, and exhaustively explaining the meanings of “Person”, the Ordinance, then lays down principles of charging, levying and collecting taxes on income of persons. These principles, through the study of the Ordinance in general and the provision of Section 80 of the Ordinance in particular, manifest three categories to be treated as persons under the Income Tax Law of Pakistan: 1. An Individual; 2. A Company or Association of Persons incorporated, formed, organized or established in Pakistan or elsewhere; 3. The Federal Government, a Foreign Government, a Political Sub-Division of a Foreign Government, or a Public International Organization.

It qualifies attention that incidence of taxation of these categories varies with the factor of residence in Pakistan, whether the taxpayer is Resident or it is a Non-Resident. The test of residence of an Individual, revolves around a question of his aggregate stay in Pakistan in a Tax Year , while for the second category listed at serial number 2 above, the test is conducted on the basis of their “control and management affairs” whether wholly and exclusively situated in Pakistan or not and also on the basis of “Permanent Establishment” in relation to that person. Based on the principles of residence, the chargeability of tax then, varies under the Income Tax Law of Pakistan, with the factor of taxpayer’s residential status.

The present paper, An Analysis of Taxability of Non-Residents under Income Tax Law of Pakistan” is a thesis towards completion of Advanced Diploma in International Taxation (ADIT) of the Chartered Institute of Taxation, UK. It is also an attempt to add to the academic taxation literature, exploring and analyzing the important provisions of Pakistan’s Income Tax Law with respect to taxability of Non-Residents, based on their residential status, together with identifying the bottlenecks and proposing necessary amendments in the same.

Keywords: Taxes, Income, Non-Residents, Double Taxation, Jurisdictions, Arm's Length