Updated Income Tax Ordinance clarifies taxable business profits, benefits, leasing receipts and financial-sector income
ISLAMABAD: The Federal Board of Revenue (FBR) has clarified the categories of income that will be taxable under the head “Income from Business” for tax year 2027.
The FBR issued the Income Tax Ordinance, 2001, updated up to June 30, 2026, explaining the provisions applicable to income from business under Section 18.
Under the updated law, profits and gains from any business carried on by a person at any time during a tax year are chargeable to tax under the head “Income from Business”, except where the income is specifically exempt under the Ordinance.
Income earned by a trade, professional or similar association from selling goods or providing services to its members is also treated as business income.
Cooperative societies’ income falls under business head
The law further clarifies that income derived by cooperative societies, including recreational clubs, from the sale of goods, immovable property or provision of services to their members is and has always been chargeable to tax under the Income Tax Ordinance.
Income earned from the hiring or leasing of tangible movable property also falls under the head of income from business.
The FBR has additionally included the fair market value of any benefit or perquisite received by a person in the course of, or by virtue of, a past, present or prospective business relationship.
Such a benefit is taxable whether it can be converted into money or not.
The law further clarifies that the term “benefit” includes an advantage arising from the waiver of profit on debt or the debt itself under the State Bank of Pakistan Banking Policy Department’s Circular No. 29 of 2002 or any other scheme issued by the central bank.
Management fees treated as business income
Management fees earned by a management company, including a modaraba management company, are also chargeable to tax under the head “Income from Business”.
The FBR has clarified that income taxable under Sections 5A, 5AA, 6, 7 and 7A of the Income Tax Ordinance will not be chargeable under Section 18.
The updated law also specifies the treatment of profit on debt. Where a person’s business consists of deriving profit on debt, such income will be taxable under “Income from Business” rather than “Income from Other Sources”.
Special rules for financial institutions
Special rules apply to certain financial institutions involved in leasing activities.
Where a scheduled bank, investment bank, development finance institution, modaraba or leasing company leases an asset to another person, any amount paid or payable in connection with the lease will be treated as income of the lessor and taxed under the head “Income from Business”.
The provision applies whether the leased asset is owned by the lessor or not.
The law also provides that any amount received by a banking company or non-banking finance company representing a distribution by a mutual fund or a Private Equity and Venture Capital Fund from its income from profit on debt will be chargeable under “Income from Business”.
Such income will not be treated as income from other sources.
The updated provisions provide the tax treatment for a broad range of commercial receipts and business-related benefits, helping determine the appropriate head under which such income is to be assessed for tax year 2027.