Tax Practices

Diplomatic and United Nations Exemptions (Sec 42)

q Income of an individual entitled to privileges under the Diplomatic and Consular Privileges
Act, 1972 or United Nations (Privileges and Immunities) Act, 1948 shall be exempt from tax
under this ordinance to the extent provided for in these acts.
q Any pension received by a person being citizen of Pakistan from United Nations or its
specialized agencies by virtue of the person’s former employment, if the salary from such
organization was exempt from tax under the Income Tax Ordinance, 2001.
Foreign Government Officials (Sec 43)
q Salary received by an employee of foreign government working in Pakistan shall be exempt
from tax if:
(i) The employee is a citizen of foreign country and not a citizen of Pakistan.
(ii) The services performed are similar to those performed by employees of Federal
Government in foreign countries; and
(iii) The foreign government grants similar exemptions to employees of Federal
Government of Pakistan performing similar services in such foreign country.
Exemptions under International Agreements (Sec 44)
q Any Pakistan source income shall be exempt if Pakistan is not permitted to tax it under a tax
treaty.
q Any salary received by an individual (who is not a citizen of Pakistan) shall be exempt from
tax under the Ordinance to the extent provided for in an Aid Agreement between the Federal
Government and a Foreign Government or Public International Organization, where:
(i) the individual is either not a resident individual or a resident individual solely by reason
of the performance of services under the Aid Agreement;
(ii) if any Aid Agreement is with a foreign country, the individual is a citizen of that country;
and
(iii) the salary is paid by the foreign government or public international organization out of
funds or grants released as aid to Pakistan in pursuance of such Agreement.
q Any income received by a person engaged as a contractor, consultant, or expert on a project
in Pakistan. This income shall be exempt from tax to the extent provided for in a bilateral or
multilateral agreement between the Federal Government and a foreign government or public
international organization, where:
(i) the project is financed out of grant funds in accordance with the agreement;
(ii) the person is either a non-resident person or a resident person solely by reason of the
performance of services under the agreement; and
(iii) the income is paid out of the funds of the grant in pursuance of the agreement.
q The Federal Government is empowered to grant exemption on income of any person on a
case-to-case basis through a notification in the Official Gazette in respect of an official
development assistance financed loans and grant-in-aid, subject to such conditions and
limitations as may be specified.
Exemption under foreign investment (Promotion and Protection) Act, 2022 (Sec 44A)
q In December 2022, ‘Foreign Investment (Promotion and Protection) Act, 2022 [‘FIPPA’] was
passed with a view to attract, encourage, and protect, large scale investments in Pakistan.
Through section 3 of FIPPA, the Federal Government has been empowered to notify any
investment, sector, industry or project as ‘Qualified Investment’ by listing it in the First
Schedule to FIPPA. Presently, the Reko Diq Project in the Province of Balochistan, including
the Reko Diq Mining Company (Private) Limited and its associated companies, have been
listed in the First Schedule to the FIPPA as Qualified Investment.

© Emile Woolf International 164 The Institute of Chartered Accountants of Pakistan

Tax Practices

Federal Government, Provincial Government, and Local Government] income (Sec 49)

q The income of the Federal Government shall be exempt from tax under this Ordinance.
q The income of a Provincial Government or a Local Government in Pakistan shall be exempt
from tax under this Ordinance, other than income chargeable under the head “Income from
Business” derived by a Provincial Government or Local Government from a business carried
on outside its jurisdictional area.
q Any payment received by the Federal Government, a Provincial Government or a Local
Government shall not be liable to any collection or deduction of advance tax.
q Exemption under this section shall not be available in the case of corporation, company, a
regulatory authority, a development authority, other body or institution established by or
under a Federal law or a Provincial law or an existing law or a corporation, company, a
regulatory authority, a development authority or other body or institution set up, owned and
controlled, either directly or indirectly, by the Federal Government or a Provincial
Government, regardless of the ultimate destination of such income as laid down in Article
165A of the Constitution of the Islamic Republic of Pakistan.
Foreign-source income of short-term resident individuals (Sec 50)

q The foreign-source income of an individual, shall be exempt if:

(i) the person is a resident individual solely by reason of the individual’s employment and

(ii) the person’s stay in Pakistan does not exceed three years.
q This exemption shall not be available to:

(i) any income derived from a business of the person established in Pakistan; or

(i) any foreign source income brought into or received in Pakistan by the person.
Foreign Source Income of Returning Expatriates (Sec 51)

q Foreign Source Income of a Citizen of Pakistan shall be exempt from tax in the year in which
the person became resident and following one tax year. For this purpose, the individual must
not remained resident in any of the four preceding tax years from the year in which the
person became resident.
q Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during
that tax year, any salary income earned by him outside Pakistan (only during that tax year)
shall be exempt from tax.
Exemptions and tax provisions in other laws (Sec 54)
No provision contained in any other law providing for:

(i) an exemption from any tax imposed under the Ordinance

(ii) a reduction in the rate of tax imposed under the Ordinance

(iii) a reduction in tax liability of any person under the Ordinance

(iv) an exemption from the operation of any provision of the Ordinance,

shall have legal effect unless it is also provided for in the Ordinance
Limitation of exemption (Sec 55)
Where any income is exempt from tax under the Income Tax Ordinance 2001, the exemption shall
be, in the absence of a specific provision to the contrary contained in the Ordinance, limited to the
original recipient of that income and shall not extend to any person receiving any payment wholly
or in part out of that income.

© Emile Woolf International 166 The Institute of Chartered Accountants of Pakistan