Budget closes tax evasion loophole

With the stroke of a pen, the federal budget for fiscal year 2022-23 also closed a much-exploited loophole whereby many people were simply avoiding paying taxes in any jurisdiction and therefore living a tax-free existence. .

To be considered liable for tax in Pakistan, one must spend at least 120 days in the country. This has been reduced from an earlier duration of 180 days. However, it was possible for some people to stay outside Pakistan on a visit visa, or any other non-resident visa in any other jurisdiction, and avoid paying taxes in Pakistan. Being on a visit visa in a different jurisdiction, they could also avoid paying taxes in that jurisdiction.

Essentially, through frequent travel and deliberate avoidance of residing in any jurisdiction, it was possible to avoid paying income or wealth taxes. It was an effective tax avoidance strategy that would now be deemed ineffective.

The budget simply proposes that if a Pakistani citizen is not tax resident in any other jurisdiction, they are tax resident in Pakistan regardless of time spent in Pakistan or elsewhere. This will ensure that they won’t get away with not paying taxes anywhere in the world, or more importantly without being tax residents anywhere in the world.

In most countries in the GCC region, there is no income tax, hence some confusion as to whether it will require mandatory filing of a tax return in Pakistan or whether you must be tax resident in Pakistan. As long as an individual is resident in another jurisdiction and has spent sufficient time there to become tax resident, they need not worry about this. Each jurisdiction has different minimum length requirements to become tax resident even if income tax is zero. Rest assured if one is tax resident in a foreign jurisdiction, this minor change should not concern them.

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