Minimum tax under Section 113 of the Income Tax Ordinance 2001 applies to companies and certain individuals in Pakistan that declare zero profit or a tax loss but still have significant turnover. If you run a business and claim losses every year, FBR may still require you to pay minimum tax. Here is everything you need to know.
Guide to minimum tax under Section 113 of Income Tax Ordinance in Pakistan. Who must pay, how to calculate, and how it differs from regular income tax. NTN registration from Rs. 2,000.
What is Minimum Tax Under Section 113?
Section 113 provides that if a company's normal income tax liability (after all deductions and exemptions) is less than 1.25% of its gross turnover, the company must pay a minimum tax equal to 1.25% of its turnover. This prevents businesses from permanently declaring losses to avoid tax while reporting high revenue.
How Minimum Tax is Calculated
Step 1: Calculate normal income tax liability based on taxable profit.
Step 2: Calculate 1.25% of gross turnover (total revenue, not profit).
Step 3: Pay whichever is higher.
Example: A private limited company with Rs. 50 million turnover and Rs. 2 million declared loss:
- Normal tax on loss: Rs. 0
- Minimum tax: 1.25% × Rs. 50 million = Rs. 625,000
- Tax payable: Rs. 625,000 (the minimum tax)
Can Minimum Tax be Carried Forward?
Yes. If minimum tax paid in a year exceeds the normal tax liability, the excess can be carried forward and adjusted against normal tax liability in the next 5 tax years. This is called the excess minimum tax credit under Section 113(2). So if your business becomes profitable in future years, you get credit for the minimum tax you paid during loss years.
Exemptions from Minimum Tax
Certain businesses are exempt from minimum tax under the Second Schedule:
- New businesses in their first year of operation
- Companies in Special Economic Zones (SEZs)
- Certain IT and export companies with approved exemptions
- Non-profit organisations with approved tax-exempt status
- Companies whose turnover falls below the prescribed threshold
Minimum Tax vs Turnover Tax — What is the Difference?
Section 113 (minimum tax) applies when normal tax is below 1.25% of turnover. Section 113A (turnover tax) applied to specific sectors. Both are variations of the same concept — ensuring companies with significant revenue pay some minimum level of tax regardless of declared profits.
How to File Minimum Tax in FBR Return
Minimum tax is calculated and declared in the company's annual income tax return (Form IT-2 for companies). The return must show: total gross turnover, normal tax liability, minimum tax calculation (1.25% of turnover), and the higher of the two amounts as tax payable.
Who Section 113 Covers
| Taxpayer | Position |
|---|---|
| Resident companies | Covered |
| AOPs above the turnover threshold | Covered |
| Individuals with business turnover above the threshold | Covered |
| Specific sectors such as distributors, oil marketing and some retailers | Covered at sector-specific rates |
| Persons exempted under the Second Schedule or special zones | Excluded, subject to conditions |
The general rate is 1.25% of turnover, with lower or different rates for specified sectors in the First Schedule. The thresholds and sector rates change with budgets, so check them for each tax year.
Frequently Asked Questions
What is the general minimum tax rate under section 113?
The general rate is 1.25% of turnover, with different rates for specified sectors under the First Schedule.
If our company made a loss, do we still have to pay income tax?
Yes, if you are a company with significant turnover. Minimum tax at 1.25% of gross turnover applies even in loss years under Section 113. The logic is that a company cannot have significant revenue without some income, and declaring a loss every year is a common tax planning technique FBR aims to prevent through minimum tax.
Does minimum tax apply to small businesses?
Section 113 primarily targets companies (Pvt Ltd, Public Ltd) and large AOPs. Individual proprietors and small AOPs below the threshold may not be subject to minimum tax. However, FBR can bring any business person under Section 113 through a notification. Consult a tax advisor to check your specific situation.
Can WHT deposits be offset against minimum tax?
Yes. Adjustable withholding taxes paid during the year are first credited against the normal tax liability. If the normal tax (or minimum tax) is still due after WHT credits, the balance must be paid. Minimum tax cannot be reduced below zero by WHT credits, but excess WHT is refundable.
Need Help With Company Tax Return and Minimum Tax?
Kamboh Associates files corporate income tax returns and handles minimum tax calculations for private limited companies across Pakistan.
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