Pakistan's Tax System and Structure in 2025

Understanding Pakistan's evolving tax landscape is essential for businesses and investors looking to operate or expand in the region. As of 2025, the country maintains a territorial taxation model, meaning only income generated within Pakistan is subject to taxation. This includes business profits, rental income, capital gains, salaries, and other earnings derived domestically. Over the past decade, Pakistan has implemented several strategic reforms to stabilize revenue collection and encourage investment—particularly through targeted incentives in special economic zones (SEZs).

Key Taxes and Current Rates

Corporate Income Tax

Pakistan revised its corporate tax structure significantly in the 2022–23 fiscal year. The rate now varies by sector: banks are taxed at 39%, non-banking corporations at 29%, and qualifying small and medium enterprises (SMEs) enjoy a reduced rate of 20%. These adjustments aim to balance fiscal responsibility with support for local entrepreneurship. Prior to this, rates had gradually decreased from 35% in FY 2013–14 until stabilizing around 30% before the latest recalibration.

Sales Tax

Sales tax replaced value-added tax (VAT) during the 1990s and remains a key source of federal revenue. Since July 2008, standard rates have ranged between 16% and 21%, depending on the product category. Both imported goods and locally manufactured items are generally liable for sales tax, although certain essentials such as basic foodstuffs and medicines may be exempt under specific conditions.

Federal Excise Duty

This tax applies to both physical goods—imported or domestically produced—and select services including insurance, advertising, courier delivery, and accounting. Rates vary widely, ranging from 5% to as high as 100% for luxury or sin goods like tobacco and alcohol. The tiered system allows the government to regulate consumption while generating additional revenue from high-margin sectors.

Customs Duties

Tariff rates across most product lines fall between 5% and 35%. A major development came into force on January 1, 2020, with the implementation of Phase II of the China-Pakistan Free Trade Agreement (CPFTA). Under this agreement, approximately 75% of tariff lines are now eligible for zero-duty treatment, significantly enhancing trade competitiveness between the two nations and improving market access for Chinese exporters.

Digital Services Tax

In response to the growing digital economy, Pakistan introduced a 30% tax on digital services in 2019. This applies to foreign tech companies providing online services—such as streaming, software subscriptions, and digital advertising—to users within Pakistan. Collected via the Federal Board of Revenue (FBR), this measure ensures that multinational digital platforms contribute fairly to national revenues.

Carbon Emissions Tax

As of 2025, Pakistan does not impose a formal carbon tax or emissions trading scheme. However, environmental regulations are gaining attention, particularly in energy-intensive industries. Future policy developments may introduce green levies aligned with climate goals, especially if international funding mechanisms like the Green Climate Fund become more integrated into national planning.

Super Tax

Introduced in FY 2021–22, the super tax targets large enterprises with annual turnover exceeding PKR 150 million. It operates as an additional levy ranging from 1% to 10%, depending on profitability and industry type. Designed as a temporary but progressive tool, it aims to enhance tax compliance among high-revenue firms without burdening smaller players.

Special Economic Zones (SEZs) Framework

Economic Zone Regulations

The Special Economic Zones Act of 2012 laid the foundation for public, private, and public-private partnership (PPP)-led SEZ development. Administered by the Board of Investment (BOI), the framework encourages industrial growth by offering robust legal protection, streamlined regulatory processes, and long-term fiscal benefits.

Major Incentives

Companies operating within designated SEZs benefit from a comprehensive package of tax reliefs. Notably, they receive a 10-year exemption from corporate income tax. Additionally, import duties on machinery, equipment, and raw materials used exclusively for setting up and running operations inside these zones are waived entirely. These provisions make SEZs highly attractive for export-oriented manufacturing and technology ventures.

Overview of Key Special Economic Zones

Pakistan has made significant progress in developing its SEZ network, with several operational and upcoming zones driving regional economic transformation.

• Rashakai Economic Zone: Spanning 1,000 acres in Khyber Pakhtunkhwa, this zone is being developed in three phases. Phase I was inaugurated in July 2023 and focuses on agro-processing, light engineering, and textiles.
• Allama Iqbal Industrial City: Located in Faisalabad, Punjab, this massive 3,217-acre zone opened in July 2021. It hosts a diverse mix of industries, including automotive parts, pharmaceuticals, and garment production, supported by modern infrastructure and logistics connectivity.
• Thabejhi Industrial Park: Situated in Sindh’s Thatta district, this 1,530-acre facility officially launched on July 15, 2023. Positioned near Karachi, it serves as a hub for heavy industry, renewable energy projects, and shipbuilding.

M3 Industrial City and other emerging zones further reinforce Pakistan’s ambition to boost industrialization and attract foreign direct investment (FDI). With strong government backing and increasing collaboration with international partners, these zones are becoming focal points for job creation and export growth.

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