Business tax · Section 113
Most people assume tax follows profit. Section 113 of the Income Tax Ordinance is the provision that breaks that assumption, and it is why loss-making companies in Pakistan still write cheques to FBR.
Minimum tax is charged on turnover, not on income. Where a company’s ordinary liability computed on profit falls below a prescribed percentage of total turnover, the higher figure applies. A business with no taxable profit therefore still has a liability, calculated on what it sold rather than on what it earned.
The policy rationale is straightforward. Reported losses are easy to manufacture and hard to disprove, and a revenue authority with limited audit capacity uses turnover as a floor because turnover is far more difficult to conceal. The cost of that approach falls on businesses whose losses are entirely genuine.
The rates
The general rate is 1.25% of turnover for most resident companies. A number of sectors operate on reduced rates reflecting thin trading margins, where a 1.25% charge on revenue would exceed any plausible profit.
| Category | Rate on turnover |
|---|---|
| General, most resident companies | 1.25% |
| Dealers of fast moving consumer goods | 0.25% |
| Pharmaceutical distributors, 2026-27 | 0.5% |
The pharmaceutical distributor rate is worth noting because it doubled for 2026-27, up from 0.25% the year before. Sector rates are revised through the annual finance legislation more often than the general rate is, so any business relying on a reduced rate should confirm its position each year rather than carrying forward last year’s assumption.
How it interacts with the corporate rate
The standard corporate tax rate is 29% of taxable income. Minimum tax does not replace that calculation; it sits underneath it as a floor. A profitable company computes tax at 29% on income, compares the result against 1.25% of turnover, and pays whichever is higher.
The arithmetic means minimum tax only bites below a particular margin. At a 29% rate the two figures converge at roughly a 4.3% net margin on turnover. Above that, ordinary tax exceeds the floor and Section 113 is irrelevant. Below it, minimum tax governs, and the thinner the margin the more punitive it becomes relative to actual earnings.
Minimum tax is not really a tax on business. It is a tax on low margins, and it falls heaviest exactly where margins are thinnest.
The carry-forward relief, and its limits
Where minimum tax exceeds the tax that would have been payable on income, the excess can generally be carried forward and set against future liability, subject to the conditions and time limits in the Ordinance. The relief recognises that a company suffering a genuinely bad year should not permanently lose the difference.
The limitation is that relief only has value if the business later becomes profitable enough to absorb it. A company trading at low margins year after year accumulates carried-forward minimum tax it will never use, and for that business the provision functions as a permanent charge rather than a timing difference.
What this means for planning
Turnover forecasting matters as much as profit forecasting for a Pakistani company. A business expecting a difficult year should model its minimum tax exposure early, because the liability arises regardless of the outturn and has to be funded from cash that a loss-making year does not generate easily.
It also changes how a business should think about volume. Chasing revenue at very low margin can increase the tax charge faster than it increases profit, which is a genuinely counterintuitive result and one that low-margin distributors in particular should model rather than assume away.
Advance tax obligations run alongside all of this. Instalments under Section 147 are based on the previous year’s assessed liability, and our guide to the four quarterly instalment dates explains how to file an estimate where the current year is running below the last.
Turnover is now largely visible to FBR
Declared turnover and observed turnover are converging. Point of sale integration covers a growing share of retail, with tens of thousands of outlets now linked, and integration requirements have been extended further. Electronic invoicing does the same for business to business supply, with a 3% penalty attaching to non-compliant invoicing under Section 21(r).
For companies that historically managed minimum tax exposure through conservative reporting, that route is closing. The correct response is to model the real charge and price for it, not to plan around a figure the system can already observe.
Common questions
What is minimum tax on turnover?
A charge under Section 113 calculated as a percentage of total turnover rather than of profit. Where it exceeds the tax computed on income, the higher figure is payable.
What is the rate?
Generally 1.25% of turnover for most resident companies. Reduced rates apply to some sectors, including 0.25% for dealers of fast moving consumer goods and 0.5% for pharmaceutical distributors in 2026-27.
Do I pay minimum tax if my business made a loss?
Yes. That is the purpose of the provision. Liability is computed on turnover, so a loss-making business with sales still has a charge.
How does it interact with the 29% corporate rate?
You compute tax at 29% on taxable income, compare it with the turnover-based figure, and pay whichever is higher. Minimum tax operates as a floor rather than a substitute.
At what margin does minimum tax stop applying?
At a 29% corporate rate the two calculations converge at roughly a 4.3% net margin on turnover. Above that, ordinary tax is higher and the floor becomes irrelevant.
Can I recover minimum tax paid in a loss year?
Excess minimum tax can generally be carried forward against future liability, subject to conditions and time limits. The relief only has value if the business later earns enough to absorb it.
Does turnover include everything I invoice?
Turnover for this purpose is defined in the Ordinance and is broader than many businesses assume. Confirm the definition applying to your sector rather than using your management accounts figure.
