Pakistan's tax system uses a differential withholding regime to push people into the documented economy: those on the Active Taxpayer List suffer lower withholding rates on a range of transactions, and those who are not pay substantially more. For anyone with meaningful banking, property or vehicle activity, the arithmetic favours filing by a wide margin.
What the ATL actually is
The Active Taxpayer List is published by FBR and is derived from having filed the income tax return for the relevant tax year by the due date. It is updated periodically and can be checked online, or by SMS to FBR's service with your CNIC.
Three misconceptions are worth clearing up:
- An NTN is not filer status. Registration and filing are different acts. A registered person who does not file is a non-filer, and is also exposed to a 114(4) notice.
- Filing late may not get you on the ATL for that year in the ordinary course; a surcharge for late inclusion applies under the Ordinance.
- Paying tax through withholding is not filing. Tax deducted at source is credited against your liability, but the return is what puts you on the list.
Where the difference bites
Higher rates for persons not appearing on the ATL apply across a range of withholding provisions, including:
- Property transactions - advance tax on purchase and on sale, under sections 236K and 236C. This is the largest single differential most people encounter, and on a substantial property it is a serious sum.
- Vehicle registration and transfer, and annual token tax.
- Banking transactions and cash withdrawals, where the applicable provisions are in force.
- Dividends and profit on debt - bank deposits, savings certificates.
- Contracts, services and supplies, where a withholding agent deducts at the higher rate.
- Prizes and winnings, auctions, and commission.
Beyond the rate differential, the Ordinance and successive Finance Acts have introduced restrictions on non-filers in relation to certain high-value transactions, and separate enforcement measures - including utility connection and mobile SIM restrictions for persons appearing on a non-filer list - have been applied at various times.
The reclaim point
Excess withholding is not a tax; it is an advance. If you have suffered tax at the non-filer rate, that amount is adjustable against your liability and refundable where it exceeds it - but only if you file a return claiming it. Most non-filers simply lose it, permanently, which is the largest hidden cost of not filing.
Who must file anyway
Filing is compulsory under section 114 for, among others:
- Every company, and every AOP
- Any person whose taxable income for the year exceeds the threshold
- Any person who owns immovable property above the prescribed size or value in a rating area, or owns any land above a prescribed area
- Any person who owns a motor vehicle above the prescribed engine capacity
- Any person registered for sales tax, or holding a commercial or industrial electricity connection above a prescribed bill amount
- Any person who has been charged to tax in either of the two preceding years
- Any non-resident owning immovable property in Pakistan
Being obliged to file and not doing so exposes you to penalty under section 182 and to a best-judgement assessment under section 121.
Filing when you have no income
This is common among students, dependent spouses and retired people who own property or a vehicle and therefore fall within the compulsory categories. A nil return with a wealth statement is filed. It costs nothing, takes an evening, and puts you on the ATL - which then saves the differential on every property or vehicle transaction afterwards.
Getting onto the list
- Register on IRIS if you are not already enrolled.
- File the return for the relevant tax year, with the wealth statement and reconciliation.
- Pay any tax due, and the surcharge for late ATL inclusion where the return is filed after the due date.
- Check the ATL after the next update, using the online facility or SMS.
The reconciliation warning
Filing for the first time means declaring assets. Where the assets do not reconcile with declared income, section 111 treats the difference as unexplained income. This is not a reason to avoid filing - the data on those assets is already with FBR, which is how the notices are generated - but it is a reason to take advice on the first return rather than filing something that invites an inquiry.
This article describes the general position under the Income Tax Ordinance, 2001. Rates, thresholds and the categories requiring compulsory filing change with each Finance Act. It is not tax advice; consult a tax practitioner.