What is Alternative Corporate Tax under section 113C, when does 17% of accounting profit apply, and which companies are outside it?

Alternative Corporate Tax, often shortened to ACT, is a second floor on company tax. Minimum tax under section 113 looks at turnover. ACT under section 113C looks at the profit shown in the company’s own financial statements. Where a company reports a healthy book profit but a small taxable income, ACT can decide what it pays.

What does the law say?

Section 113C(1) applies “for tax year 2014 and onwards”. It says the tax payable by a company, in respect of income subject to tax under Division II of Part I of the First Schedule or minimum tax under any provision of the Ordinance, “shall be higher of the Corporate Tax or Alternative Corporate Tax.”

Three definitions in section 113C(2) do the work:

Term	What section 113C(2) says
Accounting income, clause (a)	Accounting profit before tax for the tax year, as disclosed in the financial statements or as adjusted under sub-section (7) or (11), excluding the share from an associate recognised under the equity method
Alternative Corporate Tax, clause (b)	Tax at seventeen per cent of accounting income less the amounts in sub-section (8), determined under sub-section (7)
Corporate tax, clause (c)	The higher of tax payable under Division II of Part I of the First Schedule and minimum tax payable under any provision of the Ordinance

Section 113C(3) treats accounting income, less the sub-section (8) exclusions, as taxable income for the purpose of the section.

What is taken out of accounting income?

Section 113C(8) lists amounts excluded from accounting income. Our copy of the Ordinance shows these items:

• (i) exempt income;
• (ii) income which is subject to tax other than under Division II of Part I of the First Schedule or minimum tax under any provision of the Ordinance; and
• (xii) income subject to the tax credits under the sections named in that item.

The numbering jumps from (ii) to (xii), and the footnotes record that items (iv) and (v) were omitted by the Finance Act, 2015. Our copy does not show items (iii) to (xi). Read the full list in the official PDF before relying on it.

Section 113C(7) requires expenses to be apportioned between the excluded amounts and the amount treated as taxable income. So excluded income is removed net of the expenses that relate to it, not gross.

Section 113C(10) allows certain tax credits against ACT, and section 113C(11) lets the Commissioner adjust accounting income on the basis of the historical accounting pattern after giving the company a hearing.

Which companies are outside it?

• Fourth, Fifth and Seventh Schedule taxpayers. Section 113C(9) says the section does not apply to “taxpayers chargeable to tax in accordance with the provisions contained in the Fourth, Fifth and Seventh Schedules”. This page does not describe those Schedules.
• LNG terminals. Clause (11D) of Part IV of the Second Schedule says section 113C does not apply to LNG Terminal Operators and LNG Terminal Owners.
• Taxpayers that are not companies. Section 113C(1) speaks of “tax payable by a company”. Individuals and associations of persons are not within it.

Worked example (illustrative figures)

Indus Foods Ltd in Faisalabad is a resident company that is not a small company or a banking company, so its Division II rate for tax year 2027 is 29%. Its business is not listed separately in Division IX, so minimum tax is 1.25% of turnover. All amounts are invented.

1. Accounting profit before tax: Rs. 100,000,000.
2. Exempt income included in that profit, net of expenses apportioned to it under sub-section (7): Rs. 10,000,000.
3. Base for ACT: Rs. 100,000,000 - Rs. 10,000,000 = Rs. 90,000,000.
4. ACT: Rs. 90,000,000 x 17% = Rs. 15,300,000.
5. Taxable income under the normal rules, after tax depreciation and other deductions: Rs. 40,000,000. Division II tax: Rs. 40,000,000 x 29% = Rs. 11,600,000.
6. Turnover: Rs. 600,000,000. Minimum tax: Rs. 600,000,000 x 1.25% = Rs. 7,500,000.
7. Corporate tax is the higher of step 5 and step 6: Rs. 11,600,000.
8. Tax payable is the higher of corporate tax and ACT: Rs. 15,300,000.
9. The excess, Rs. 15,300,000 - Rs. 11,600,000 = Rs. 3,700,000, is carried forward under section 113C(4) and (5).

If the company’s taxable income had been close to its accounting profit, Division II tax at 29% would normally exceed ACT at 17%, and ACT would change nothing.

What if …?

What if the company has an accounting loss? Then accounting income is negative and ACT at 17% produces nothing to compare. The company still faces minimum tax under section 113 if its normal tax is nil or low.

What if taxes other than Division II tax apply? An Explanation at the end of section 113C says taxes payable other than under Division II remain payable in the mode and manner of their own provisions. This page does not deal with super tax.

Common mistakes

• Applying 17% to gross accounting profit. The sub-section (8) exclusions come off first, with expenses apportioned under sub-section (7).
• Comparing ACT only with Division II tax. Corporate tax already means the higher of Division II tax and minimum tax.
• Treating ACT paid over corporate tax as lost. Sub-sections (4) and (5) carry the excess forward, for up to ten tax years.

What to check in the official text

Read section 113C in full in the official PDF, particularly the complete list in sub-section (8), which our copy does not show in full, and the credits named in sub-section (10). Check the Fourth, Fifth and Seventh Schedules if your business may fall under them, and clause (11D) of Part IV of the Second Schedule.