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Exemptions under International Agreements

Updated on October 8, 2009

Exemption as a result of tax treaty:

Any Pakistan-source income for which Pakistan is not permitted to tax under a tax treaty shall be exempt from tax under the Income Tax Ordinance, 2001.

Salary Income of an Individual Performing Services under an Aid Agreement:

The salary income of an individual shall be exempt from tax, if the following conditions are satisfied:

1)         Foreign nationality:

            The individual is not a citizen of Pakistan.

2)         Performance of services under an Aid Agreement:

The individual is performing services under an Aid Agreement between the Federal Government and a foreign government or public international organization.

3)         Non-resident or resident only due to service:

            The individual is either non-resident or is resident only due to performance of his   services under an Aid Agreement.

4)         Nationality of aiding country:

            The individual is a citizen of that foreign country with which the aid agreement has been entered into.

5)         Payment of salary from aided funds:

The salary is being paid to the individual by the foreign government or public international organization out of funds or grants released as aid to Pakistan.

Income of a Contractor, Consultant or Expert:

Any income received by a person engaged as a contractor, consultant, or expert on a project in Pakistan shall be exempt from tax if the following conditions are fulfilled:

1)         Foreign nationality:

            The person is not a citizen of Pakistan.

2)         Performance of services under Technical Assistant Agreement:

            The person is engaged on a project in Pakistan being undertaken under a bilateral or multilateral technical assistance agreement between the   Government of Pakistan and a foreign government or public international             organization.

3)         Financing of project from aided funds:

            The project is being financed out of the funds available in accordance with             the aid agreement.

4)         Non-resident or resident only due to service:

            The person is either a non-resident or a resident only due to the performance of    services under the agreement.

5)         Receipt of income from aided funds:

            The person has received income out of the funds of the grant available       according to the agreement.

Allowances Attached to President's Honours, Awards etc. [45]

i)          Any allowance attached to any Honour, Award, or Medal; or

ii)         Any monetary award;

            granted to a person by the President of Pakistan shall be fully exempt from tax.

Explanation:

The President of Pakistan awarded to player of Pakistan Cricket Team Rs. 100,000 each as a result of winning of test series in India. Such monetary award granted by the President of Pakistan is fully exempt from tax.

Profit (interest) on Debt Received by a Non-resident Person [46]

Any profit (interest) received by a non-resident person on a security issued by a resident person shall be exempt from tax, where:

1)         Payer and payee are not associates:

            The persons are not associates

Note:   If such payment is made by the associate of non-resident person, exemption shall not be granted to a non-resident person  

2)         Security was widely issued outside Pakistan for raising loan:

            The security was widely issued by the resident person outside Pakistan for            the purposes of raising a loan outside Pakistan for using such loan in a           business carried on by the resident person in Pakistan.

3)         Payment of profit outside Pakistan:

            The profit on security was paid outside Pakistan to non-resident person.

4)         Approval of security from the FBR for exemption:

The security has been approved by the FBR for the purposes of this exemption.

Explanation:

ICI Pakistan Limited issued 6% debentures outside Pakistan to raising loan for its business in Pakistan. Mr. Lewis, a British Nationality Holder and non-resident in Pakistan during the tax year purchased debentures. ICI paid profit (interest) on such debentures to Mr. Lewis from its bank account in London.

It is fully exempt from tax.

Scholarship [47]

Any scholarship granted to a person to meet the cost of the person's education shall be exempt from tax provided that such scholarship has not been paid by an associate of the payee.

Note: HEC scholarship is an important example of such scholarship.

Explanation:

Shezan International Limited decided to provide management course to its employees. They contracted with LUMS to provide such facility and incurred Rs. 500,000 in respect of each employee. Mr. Muhammad Ali is one of the employees who enjoyed free management course facility provided by the employer.

Point to be noted:

This facility is fully exempt from tax for Mr. Muhammad Ali.

Support Payment under an Agreement to Live Apart [48]

Any income received by a spouse as support payment under an agreement to live apart shall be exempt from tax.

The Federal and Provincial Government and Local Authority [49]

Income of the following persons shall be exempt from tax:

i)          The Federal Government;

ii)         A Provincial Government; and

iii)         A local authority in Pakistan.

However, "Income from Business" derived by a Provincial Government or a local authority from a business carried on outside its jurisdictional area shall be taxable.

For example:

Government of the Punjab invested in certain business carried on in the jurisdiction of Government of the Sindh. So, any income derived by the Government of Punjab shall be taxable.

Foreign-Source Income of Short-Term Resident Individuals [50]

Foreign-source income of short-term resident individual shall be exempt from tax provided that:

1)         Resident only due to employment:

            The individual is resident only due to his employment in Pakistan.

2)         Residential period not exceeding three years:

            The individual is resident in Pakistan for a period which is not more than three       years.

Note:   Following incomes of a short-term resident individual shall not be exempt from      tax.

i)          Income derived by the individual from the business established in   Pakistan; or

ii)         Any foreign source income has been brought into Pakistan or received in   Pakistan by the person.

Foreign-Source Income of Returning Expatriates:         [51]

Foreign-source income of a Pakistani returning back in Pakistan is exempt for two years starting from the year in which he became resident if:

i)          The income accrues or arises outside Pakistan.

ii)         The person was not resident of Pakistan in any of the four years immediately preceding the year in which he became again resident.

For example:

Mr. Ali was settled in England with his family since 2001 as a result of immigration. He returned to Pakistan in March 2008 to reside in Pakistan again as a resident. He earned Rs.500,000 as income from business in England and brought it into Pakistan. His income from business shall be exempt from tax for the tax year 2008 and for the tax year 2009.

However, salary income of a Pakistani shall be exempt from tax if the individual:

a)         Left Pakistan during the tax year;

b)         Remained abroad during the tax year; and

c)         Earned such salary income from outside Pakistan during the tax year.

Exemptions under Part-1 of the Second Schedule:

Part-1 of the Second Schedule provides certain incomes, or classes of incomes, or persons or classes of persons which shall be exempt from tax, subject to the conditions and to the extent specified under each case.

Employee of Agha Khan Development Network Pakistan (AKDNP)

The salary income of a person working as an expert, advisor, consultant or senior management staff in any institution run by AKDNP is exempt from tax if the employee is not citizen of Pakistan.

Salary Income of a Pakistani Seafarer Working on a Foreign Ship:

Salary income derived by a Pakistani seafarer working on a foreign vessel (or on Pakistan flag vessels for 183 days or more during a tax year) is fully exempt from tax; if it fulfills the following conditions:

a)         Salary income is remitted to Pakistan not later two months of the relevant income year.

b)         It is remitted through normal banking channels.

Allowance etc. to a Person Working Outside Pakistan:

Any allowance or perquisite paid or allowed by the Government of Pakistan to a Pakistani appointed by the Government of Pakistan to a Pakistani appointed by the Government of Pakistan in any foreign country is exempt from tax and who perform services for Govt. of Pakistan in any foreign country and such allowance or perquisite is also paid or allowed in foreign country.

Explanation:

Mr. Ansar is working as Pakistani High Commissioner in USA. The Government of Pakistan has incurred the following expenditures in respect of:

Utilities allowance                        Rs.100, 000

Conveyance allowance               Rs.150, 000

Rent free accommodation          Rs.270, 000

Point to be noted:

Although utilities, conveyance and accommodation are taxable but if these are received or allowed to a Pakistani in any foreign country. So, all perquisites received by Mr. Ansar are fully exempt from tax that he is performing services outside Pakistan on behalf of the Govt. of Pakistan.

Pension:

Pension received by the following persons is exempt from tax:

1)         Pension received by any citizen of Pakistan.

2)         Pension received by members of Armed Forces of Pakistan or employees            of the Federal Government or a Provincial Government.

3)         Commutation of pension received from Government or under any pension             scheme approved by the FBR.

4)         Pension received by the families and dependents of public servants or members of the Armed Forces of Pakistan who died during service.

4)         Pension received by the families and dependents of "Shaheeds".

5)         Pension of former President of Pakistan and his widow under the President Pension Act, 1974.

Notes:

i)          Exemption in respect of pension shall be withdrawn if the retired person is re-        employed by the same employer or an associate of the employer.

ii)         Where a person receives more than one pension, then only one pension having higher amount shall be exempt and remaining others shall be taxable.

Leave Encashment:

Any sum representing encashment of leave preparatory to retirement of a member or the Armed Forces of Pakistan or an employee of the Federal Government or a Provincial Government is fully exempt from tax.

Annuity:

An annuity received from Pakistan Postal Annuity Certificates Scheme is exempt upto Rs. 10,000. Income from all other annuities is fully taxable.

Funds:

Any amount received by any person on account of:

i)          Provident fund registered under the Provident Fund Act, 1925.

ii)         Accumulated balance of recognized provident fund.

iii)         Benevolent Fund.

iv)        Approved superannuation fund

v)         Workers' Profit Participation Fund (WPPF)

Accumulated Balance of Provident Fund:

An accumulated amount received by an employee participating in a provident fund is exempt from tax provided that it is a recognized provident fund.

Explanation:

Only the accumulated balance of employer's contribution and interest on such contribution shall be taxable in the year of receipt in case of unrecognized provident fund, if the fund has not been established under the Provident Fund Act, 1925

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