Analysis: Budget plugs a tax evasion loophole

With a stroke of pen, the federal budget for the 2022-23 fiscal also closed a much-exploited loophole through which many individuals simply avoided paying taxes in any jurisdiction, and hence lived a tax-free existence.

To be considered liable to pay tax in Pakistan, one has to spend at least 120 days in the country. This was reduced from an earlier duration of 180 days. However, it was possible for certain individuals to stay out of 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.

In essence through frequent travel and by deliberately avoiding residency in any jurisdiction, it was possible to avoid paying any income or wealth taxes. It was an effective tax avoidance strategy which would now be deemed ineffective.

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

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