What is a small company for tax purposes, and does it get a lower rate?

Pakistan’s Income Tax Ordinance, 2001 has a lower corporate rate for companies it calls “small companies”. The label is a legal definition with five conditions, all of which must hold. A company that meets them pays 20% on its taxable income instead of the 29% rate for most other companies.

What does the law say?

Clause (59AB) of section 2 defines “Small Company” as a company registered on or after the first day of July, 2005, under the Companies Act, 2017, which:

Condition	Text of the definition
(i) Capital	has paid up capital plus undistributed reserves not exceeding fifty million rupees
(ia) Employees	has employees not exceeding two hundred and fifty any time during the year
(ii) Turnover	has annual turnover not exceeding two hundred and fifty million rupees
(iii) Origin	is not formed by the splitting up or the reconstitution of company already in existence
(iv) Not an SME	is not a small and medium enterprise as defined in clause (59A)

The footnotes show the limits have been raised over time. The capital limit was “twenty-five” million until the Finance Act, 2015 substituted “fifty”, and the words “and fifty” were inserted into the turnover limit.

Clause (59A) defines a “small and medium enterprise” as a person engaged in manufacturing, as the Ordinance defines that term, whose business turnover in a tax year does not exceed two hundred and fifty million rupees. A small manufacturer meeting that definition is therefore an SME and, because of condition (iv), not a small company. The separate treatment of SMEs is not covered on this page.

What rate does a small company pay?

Division II of Part I of the First Schedule sets the company rates. Its Table, as substituted by the Income Tax (Amendment) Act, 2025 and amended to 30 June 2026, reads:

Type of company	Rate of tax
Small company	20%
Banking company	44% for tax year 2025, 43% for tax year 2026, 42% for tax year 2027 and onwards
Any other company	29%

So for tax year 2027 a small company pays 20% of taxable income, and an ordinary company that fails any condition pays 29%.

How does it work in practice?

The conditions are tested on the company’s own position. Three of them look at the year:

• employees “any time during the year”, so a single peak above 250 is enough to fail;
• “annual turnover”; and
• paid-up capital plus undistributed reserves.

The other two are fixed facts: the registration date on or after 1 July 2005, and the way the company came into existence. A company registered before 1 July 2005 can never qualify, however small it is.

The definition does not say which date the capital and reserves test is measured at, or give a transition rule when a company crosses a limit mid-year. It does not explain those points, and this page does not resolve them.

Worked example (illustrative figures)

Three private companies in Rawalpindi, all figures invented, tax year 2027.

Noor Software Solutions (Pvt) Ltd, registered 2016, paid-up capital plus undistributed reserves Rs. 35,000,000, peak staff 60, turnover Rs. 140,000,000, formed from scratch, not a manufacturer.

1. All five conditions are met, so it is a small company.
2. Taxable income: Rs. 12,000,000.
3. Tax: Rs. 12,000,000 x 20% = Rs. 2,400,000.
4. At the 29% rate it would have been Rs. 12,000,000 x 29% = Rs. 3,480,000. The difference is Rs. 1,080,000.

Potohar Traders (Pvt) Ltd, same figures but registered in 2003. It fails the registration date test and pays 29%.

Margalla Logistics (Pvt) Ltd, registered 2019, turnover Rs. 240,000,000, but formed by splitting a larger existing company. It fails sub-clause (iii) and pays 29%.

What if …?

What if turnover goes above Rs. 250 million? Sub-clause (ii) is no longer met, so the company is not a small company and the “Any other company” rate applies.

Does a small company escape minimum tax? Our copy of clause (11A) of Part IV of the Second Schedule, which lists persons to whom section 113 minimum tax does not apply, prints two versions of the list. One includes “a Small Company as defined in section 2”, and the other, which carries later amendments, does not show that entry clearly. We cannot confirm from our copy whether the entry is in force. Check the official PDF.

Is a small company a “company” for all purposes? Section 80, which defines “company”, includes a Small Company as defined in section 2, so the general company rules apply unless a provision says otherwise.

Common mistakes

• Looking only at turnover. All five conditions must be met, including capital, staff and registration date.
• Assuming any small manufacturer qualifies. A manufacturer with turnover up to Rs. 250 million is an SME under clause (59A) and is excluded by sub-clause (iv).
• Using older rates. Earlier provisos set 25%, then a falling scale down to 20% from tax year 2023. The current Table sets 20%.

What to check in the official text

Read clauses (59A) and (59AB) of section 2 with their footnotes, and the Division II Table in Part I of the First Schedule. Confirm the list in clause (11A) of Part IV of the Second Schedule against the official PDF before assuming anything about minimum tax.