FBR Tax Filing for Non-Resident Pakistanis – A Simple Q&A Guide
The Federal Board of Revenue (FBR) is Pakistan’s central authority for tax collection and enforcement. It plays a vital role in helping the government achieve its fiscal objectives by implementing tax laws and ensuring compliance.
The primary legislation governing income tax in Pakistan is the Income Tax Ordinance, 2001. This law outlines everything from tax rates and filing requirements to exemptions, penalties, and obligations for both residents and non-resident individuals or entities.
For the most accurate and up-to-date information, including rules, notifications, and tax updates, please visit the official FBR website: http://www.fbr.gov.pk
Question 1: What are the legal criteria for determining whether a person is a resident or non-resident in Pakistan for tax purposes?
Answer:
Under the Income Tax Ordinance, 2001, an individual is considered a resident for tax purposes in Pakistan if they meet the following conditions during a tax year (which runs from July 1 to June 30):
Physical Presence Test
- The individual has stayed in Pakistan for 183 days or more during the tax year.
If this condition is not met, that is, the person has stayed in Pakistan for less than 183 days during the tax year, they are classified as a non-resident for tax purposes.
Question 2: Why is it important to understand the concept of residency and its tax implications under Pakistani law?
Answer:
Understanding your residency status is critical because it directly affects your tax obligations under Pakistani law. The distinction determines what portion of your income is subject to tax in Pakistan:
- Residents are taxed on their worldwide income, regardless of where it is earned.
- Non-residents are taxed only on income sourced from Pakistan, as specified in Section 11(6) of the Income Tax Ordinance, 2001.
Correctly identifying your status ensures compliance with tax laws and helps avoid penalties or legal complications.
Question 3: Are there any tax benefits available for non-resident Pakistanis?
Answer:
Yes, non-resident (Overseas) Pakistanis are entitled to certain tax benefits under the Income Tax Ordinance, 2001, particularly when it comes to property transactions.
Specifically, advance income tax rates on the purchase and sale of immovable property (under Sections 236C and 236K) are applied at the filer rate, even if the individual is not registered as a tax filer, provided the following conditions are met:
- The individual holds a valid POC (Pakistan Origin Card) or NICOP (National Identity Card for Overseas Pakistanis); and
- The individual qualifies as a non-resident, meaning they have stayed in Pakistan for less than 183 days during the relevant tax year.
- There are several other benefits as well, such as a simplified tax return filing process for non-resident individuals, making compliance easier and more straightforward.
These benefits offer significant relief by allowing eligible non-residents to avoid the higher tax rates normally applied to non-filers and fewer administrative procedures to follow.
Question 4: What is foreign remittance, and how is it taxed in Pakistan?
Answer:
In Pakistan, foreign remittance refers to funds sent into the country from abroad, most commonly by Overseas Pakistanis, to support family, make investments, or for other personal or business purposes.
Under Section 111(4) of the Income Tax Ordinance, 2001, the tax treatment of foreign remittances is as follows:
- Exempt from Income Tax: Foreign remittances are not subject to income tax if they are received through official banking channels, such as:
- Wire transfers, Licensed remittance services, or Roshan Digital Accounts (RDA)
- Encashment Requirement: The remitted amount must be converted into Pakistani Rupees via a scheduled bank in Pakistan.
- No Source Explanation Required: The recipient is not required to explain the source of the foreign income, and no tax will apply, provided that:
- The remittance is properly documented, and
- The total amount does not exceed PKR 5 million in a tax year.
- Amounts Above PKR 5 Million: Remittances exceeding this threshold may trigger additional scrutiny under Anti-Money Laundering (AML) regulations and sometimes an audit.
Foreign remittances must still be declared in the Wealth Statement of the recipient under the relevant head. While not taxable, they form part of your total wealth and are important for proper wealth reconciliation.
Question 5: What is the difference between foreign income and foreign remittance?
Answer:
The terms foreign income and foreign remittance may sound similar, but they have very different meanings in tax laws.
Foreign Income
- Refers to income earned outside Pakistan by a resident taxpayer.
- Examples include:
- Salary earned abroad
- Rental income from overseas property
- Business profits or freelance income from foreign clients
- This income is taxable in Pakistan and must be declared in the annual tax return under the applicable income head.
Foreign Remittance
- Refers to money sent to Pakistan from abroad, usually by Overseas Pakistanis, to family members or for investment.
- It is not considered taxable income, provided the remittance is:
- Sent through official banking channels, such as wire transfers or Roshan Digital Accounts, and
- Properly documented, as per Section 111(4) of the Income Tax Ordinance, 2001.
Tax Exemption Limit:
- Foreign remittances of up to PKR 5 million per tax year are fully exempt from tax and do not require explanation of source.
- If the amount exceeds PKR 5 million, the taxpayer may be asked to explain the source of funds for AML (Anti-Money Laundering) compliance.
More Q&A on FBR Pakistan Tax can be viewed here:https://accountingblogger.com/fbr-pakistan-tax-return/
Question 6: How is freelancer income taxed and reported in the FBR tax return?
Answer:
Freelancer income earned from providing digital or IT-enabled services to foreign clients is treated as the export of services under Section 154A of the Income Tax Ordinance, 2001.
This income is taxed under the Final Tax Regime (FTR), meaning no additional tax is charged once the applicable rate is paid.
Applicable Tax Rates:
- 1% for individuals listed on the Active Taxpayers List (ATL)
- 0.25% for filers who are:
- Registered with PSEB (Pakistan Software Export Board), and
- Providing approved IT and IT-enabled services
Key Conditions for Tax Benefits:
- The income must be received through official banking channels.
- The tax paid under Section 154A is final, no additional income tax is applicable on this income.
- You must declare this income in your FBR tax return using the appropriate tax codes:
- 64060285 for the 1% rate.
- 64060290 for the 0.25% rate.
Bottom Line
In Pakistan, tax residency status plays a crucial role in determining your tax obligations:
- Resident taxpayers are taxed on their global income, including any earnings from outside Pakistan (e.g., foreign salary, rent, or business income).
- Non-residents are taxed only on income sourced within Pakistan.
If you’re a resident and earn income abroad, you are required to declare it in your tax return. However, you may be eligible to claim a foreign tax credit for any taxes already paid overseas, subject to conditions. The key point is that correctly determining your residency status is essential to ensure full compliance with FBR regulations and to avoid potential tax issues or penalties.
Disclaimer
This article is for general information only and aims to help readers understand how to file tax returns in Pakistan. As FBR rules and tax return forms change frequently, always check the latest updates and consult a qualified tax advisor before filing. The author and blog are not responsible for any errors, omissions, or outcomes resulting from the use of this information.
ABOUT THE AUTHOR
Humayun Atif | CMA, CPA, CA (FIN), MS-IT, Oracle Certified, CA Articles from Big4
Atif is passionate about Business, Tech, and the written word. He is the author of the book ‘IFRS Made Easy’. He is a Tax and IFRS coach and the founder of accountingblogger.com
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