Corporate taxation in Pakistan can be complex, and businesses need to stay informed to comply effectively. One important provision that companies should be aware of for tax year 2026 is the Alternative Corporate Tax (ACT), governed under Section 113C of the Income Tax Ordinance, 2001.
This article breaks down the concept, calculation, and practical implications of ACT in an easy-to-understand and interactive way.
What is Alternative Corporate Tax (ACT)?
Alternative Corporate Tax (ACT) is a mechanism to ensure that companies pay the higher of their corporate tax or ACT. Essentially:
If the ACT exceeds the regular corporate tax, companies are required to pay ACT instead.
This applies to income under Division II of Part I of the First Schedule or minimum tax provisions.
Key Definitions
1. Accounting Income
o Profit before tax as per financial statements
o Adjusted as per Sections 7 and 11
o Excludes share from associates recognized under equity method
2. Alternative Corporate Tax (ACT)
o Tax rate: 17% of Accounting Income, after specified exclusions
3. Corporate Tax
o Higher of:
Tax under Division II of Part I of First Schedule
Minimum tax under any other provisions of the Ordinance
How ACT is Calculated
1. Start with Accounting Income.
2. Subtract amounts excluded under Section 113C(8), such as:
o Exempt income
o Income taxed under other provisions
o Income eligible for tax credits under Sections 65D, 65E, 100C
3. Apply 17% tax rate to the remaining income.
✅ Interactive Tip: Companies can maintain a worksheet that separates excluded income from taxable accounting income for precise ACT computation.
Excess ACT & Carry Forward
If ACT paid > Corporate Tax, the excess can be carried forward to offset future corporate tax liability.
• Adjustment is allowed for up to 10 tax years following the year of computation.
• Any amendments to corporate tax or ACT affect the carried-forward amount proportionally.
💡 Example:
If a company pays PKR 1,000,000 as ACT but its corporate tax is PKR 700,000, the excess of PKR 300,000 can be applied to reduce tax in subsequent years (up to 10 years).
Who is Exempt from ACT?
• Taxpayers under Fourth, Fifth, and Seventh Schedules of the Ordinance
• Certain credits under Sections 64B and 65B are allowed against ACT
Practical Steps for Businesses
1. Check Accounting Income
o Ensure accurate adjustments under Sections 7 & 11
2. Identify Exclusions
o Exempt income and income under tax credit provisions
3. Calculate ACT
o 17% of adjusted accounting income
4. Compare With Corporate Tax
o Pay the higher of ACT or regular corporate tax
5. Track Excess ACT
o Maintain records for carry forward up to 10 years
📊 Pro Tip: Use accounting software or a tax consultant to streamline ACT calculations and avoid errors in carry-forward adjustments.
Why ACT Matters in Tax Year 2026
• Encourages compliance by ensuring companies pay minimum effective tax
• Helps prevent under-reporting of profits
• Ensures businesses correctly utilize tax credits and exemptions
ACT is especially relevant for companies with high accounting profits but low taxable income, as it prevents paying a disproportionately low corporate tax.
Quick FAQ:
Q1: Is ACT mandatory for all companies?
• No. Companies under Fourth, Fifth, and Seventh Schedule are exempt.
Q2: Can ACT be reduced by tax credits?
• Yes. Credits under Sections 64B and 65B are allowed against ACT.
Q3: How long can excess ACT be carried forward?
• Up to 10 years from the year of computation.
Q4: Does ACT replace other taxes?
• No. Taxes outside Division II of Part I of the First Schedule remain payable separately.
Conclusion
Alternative Corporate Tax ensures that companies in Pakistan pay a fair share of taxes, even if accounting profits are high but taxable income is low. Understanding Section 113C and applying it correctly helps businesses stay compliant while optimizing tax planning.
📌 Key Takeaway: Companies must calculate both Corporate Tax and ACT, pay the higher amount, and carefully track any excess for future adjustments.
Disclaimer: This article is for informational and educational purposes only and does not constitute legal or professional tax advice. Businesses and individuals should consult a qualified tax advisor or the Federal Board of Revenue (FBR) for guidance specific to their circumstances. The author and publisher are not responsible for any actions taken based on the information provided.