Section 113 requires specified taxpayers to pay a minimum tax based on turnover when their normal tax liability falls below the prescribed threshold.
ISLAMABAD: The Income Tax Ordinance, 2001 sets out the minimum tax regime applicable to certain taxpayers in Pakistan for Tax Year 2027, requiring them to pay a minimum amount of tax based on turnover where their normal tax liability falls below the prescribed threshold.
The Federal Board of Revenue (FBR) has issued the Income Tax Ordinance, 2001 updated up to June 30, 2026, applicable to Tax Year 2027, covering the period from July 1, 2026 to June 30, 2027.
Section 113 of the Income Tax Ordinance, 2001 sets out the minimum tax provisions applicable to specified taxpayers.
Who is subject to minimum tax?
Under Section 113(1), the minimum tax provisions apply to:
• A resident company;
• A permanent establishment of a non-resident company;
• An individual having turnover of Rs100 million or above in Tax Year 2017 or any subsequent tax year; and
• An association of persons (AOP) having turnover of Rs100 million or above in Tax Year 2017 or any subsequent tax year.
The provision applies where, for any reason permitted under the Income Tax Ordinance or any other law, the taxpayer has no tax payable or paid for a tax year, or the tax payable or paid is lower than the minimum tax calculated at the prescribed percentage of turnover.
When does minimum tax apply?
Section 113 can apply where a taxpayer’s normal tax liability falls below the prescribed minimum because of factors including:
Loss: Where the taxpayer incurs a loss during the year.
Previous-year losses: Where a loss from an earlier tax year is set off against current-year income.
Tax exemption: Where income is exempt from tax.
Tax credits or rebates: Where available credits or rebates reduce the tax liability.
Allowances and deductions: Where allowances or deductions, including depreciation and amortisation, reduce taxable income to the extent that the resulting tax is below the prescribed minimum.
In these circumstances, the minimum tax is determined with reference to turnover rather than simply taxable profit.
What is excluded from tax payable?
Section 113 clarifies that the expression “tax payable or paid” does not include tax already paid or payable in respect of deemed income that is assessed as a final discharge of tax liability under Section 169 or another provision of the Ordinance.
It also excludes tax payable or paid under Section 4B or Section 4C.
How is minimum tax calculated?
Where Section 113 applies, the aggregate turnover of the taxpayer for the tax year is treated as the person’s income chargeable to tax for that year.
The taxpayer is then required to pay minimum tax instead of the tax otherwise payable under the normal provisions of the Income Tax Ordinance.
The minimum tax is calculated by applying the rates specified in Division IX of Part I of the First Schedule to the taxpayer’s turnover.
The applicable rate therefore depends on the category of taxpayer and the relevant provisions of the First Schedule.
What constitutes turnover?
Section 113(3) provides a specific definition of turnover for minimum tax purposes.
It includes the following:
1. Gross sales and receipts
Turnover includes gross sales or gross receipts from the sale of goods. Sales Tax, Federal Excise Duty and trade discounts shown on invoices or bills are excluded.
Amounts treated as deemed income and assessed as a final discharge of tax liability are also excluded where the relevant tax has already been paid or is payable.
2. Fees and commissions
Turnover includes gross fees received for rendering services or providing benefits, including commissions.
However, amounts covered by a final discharge of tax liability, where the relevant tax is separately paid or payable, are excluded.
3. Contract receipts
Gross receipts from the execution of contracts are included in turnover.
Again, receipts covered by a final discharge of tax liability, for which tax is separately paid or payable, are excluded.
4. Share of an AOP’s turnover
In the case of a company that is a member of an association of persons, its share of the amounts referred to above is also included in turnover.
Can sale of immovable property be included?
The Ordinance specifically clarifies that the definition of turnover covers receipts from all business activities, consistent with the expression “turnover from all sources” used in Section 113(1).
This can include receipts from the sale of immovable property where those receipts are taxable under the head Income from Business.
Therefore, determining turnover for minimum tax purposes is not necessarily limited to conventional sales of goods. Business receipts falling within the statutory definition can form part of the turnover base.
Can excess minimum tax be carried forward?
Yes.
Where the minimum tax paid under Section 113 exceeds the actual tax payable under clause (1) of Division I or Division II of Part I of the First Schedule, the excess tax can be carried forward for adjustment against the taxpayer’s tax liability in subsequent tax years.
Where minimum tax becomes payable because no tax is otherwise payable or paid for the year, the entire amount of minimum tax paid under Section 113 can be carried forward for adjustment.
However, the Ordinance provides a specific time limit. The amount can be carried forward and adjusted against tax liability for the two tax years immediately succeeding the tax year for which the amount was paid.
Key points for Tax Year 2027
Section 113 establishes a minimum tax liability based on turnover for specified taxpayers where normal tax payable falls below the statutory minimum.
For Tax Year 2027, companies, qualifying individuals and AOPs should therefore assess both their normal income tax liability and Section 113 minimum tax liability when preparing their annual tax returns.
The calculation requires particular attention to the statutory definition of turnover, including gross sales, service fees, commissions, contract receipts and certain business receipts from immovable property.
Taxpayers should also account for statutory exclusions and the two-year carry-forward rule applicable to excess minimum tax.