A Comprehensive Guide to Tax Exemptions in Pakistan

Tax exemptions in Pakistan play a key role in reducing the tax burden for individuals, businesses, and organizations.

These exemptions are allowed under the Income Tax Ordinance, Sales Tax Act, Customs Act, and Federal Excise Act.

They are not just financial reliefs; they are designed to:

• Promote economic growth and industrial development
• Ensure food security and support disaster recovery
• Boost exports and IT services
• Fulfill international treaties and agreements

For taxpayers, understanding these exemptions means smarter tax planning, legal compliance, and maximizing available benefits.

1. Income Tax Exemptions in Pakistan

Income tax exemptions cover multiple income types and are detailed in the Second Schedule of the Income Tax Ordinance.

Key Categories:

• Salaries
  • Certain foreign employees, overseas service allowances, and specific health professionals.
• Pensions & Gratuities
  • Payments from approved funds and pensions to families of government employees/armed forces.
• Allowances & Benefits
  • Free residence, transport, medical, and education benefits (with conditions).
• Profit on Debt
  • Income for foreign banks, investors, and international institutions.
• Capital Gains
  • Exemptions on listed securities, mutual funds, and property (held over four years).
• Business Income
  • IT and software exports (till June 2025), hydropower, LNG terminals, greenfield industries, Special Technology Zones, and venture capital.
• International Agreements
  • Diplomats, foreign government employees, and organizations under aid/treaty agreements.
• Miscellaneous
  • Scholarships, medals/awards, charitable organizations, and foreign remittances.

➡️ SMEs and some industries are also exempt from minimum turnover tax and certain withholding taxes.

2. Sales Tax Exemptions

Sales tax exemptions are mainly listed in the Sixth Schedule of the Sales Tax Act.

Major Exemptions:

• Essential Goods – Basic food items, medicines, etc.
• Zero-Rated Supplies – Exports, raw materials for Export Processing Zones, supplies to diplomats, Gwadar Special Economic Zone.
• Greenfield Industries – Exemption on import of plant and machinery.
• Aid & Charities – Goods imported under official grants.
• Special Projects – Lahore Orange Line Metro Train and similar projects.

3. Customs Duty Exemptions

Customs duty relief is granted under the Customs Act to support national priorities.

Examples:

• Temporary imports meant for re-export
• Duty refunds for goods used in manufacturing exports
• Passenger baggage allowances
• Authorized Economic Operator (AEO) benefits, like deferred payments and simplified processes

4. Federal Excise Duty Exemptions

The Federal Excise Act 2005 exempts many goods and services except those listed in its schedules.

Key Exemptions:

• Goods/services not included in the First Schedule
• Zero-rating for certain exports
• Gwadar Port Projects – 40-year exemption on many supplies
• Border trade markets with Iran and Afghanistan
• Telecom/IT services for software exporters

Why Tax Exemptions Matter?

• For Individuals: Lower tax liability, retirement benefits, education reliefs, and remittance advantages.
• For Businesses: Encouragement for IT, exports, renewable energy, and greenfield projects.
• For the Economy: Drives investment, strengthens trade, and supports long-term growth.

Final Thoughts

Pakistan’s tax exemption regime is vast but conditional. It offers opportunities for both individuals and businesses to save money while aligning with national priorities.

✅ Tips for taxpayers:

• Stay updated with the latest laws and SROs.
• Use exemptions for better tax planning.
• Consult a tax expert to ensure compliance and maximize benefits.