Is a partnership firm taxed separately from its partners in Pakistan, and is my share of profit taxed again?

A partnership firm in Pakistan is a taxpayer in its own right. The Income Tax Ordinance, 2001 taxes the firm on its profit, and the partner’s share taken out of that taxed profit is exempt in the partner’s hands. The share is not ignored altogether, though: it still counts when the rate on the partner’s other income is worked out.

What does the law say?

The firm is an association of persons. Section 80(1)(b) treats an association of persons (AOP) as a “person” for the Ordinance. Section 80(2)(a) says an association of persons includes a firm, a Hindu undivided family, any artificial juridical person, a limited liability partnership and any body of persons formed under a foreign law, but not a company. Section 80(2)(c) defines a firm as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

The AOP is taxed separately. Section 92(1) says an association of persons shall be liable to tax separately from its members. It then provides that, where the association has paid tax, the amount received by a member in the capacity as member out of the income of the association is exempt from tax.

Two provisos narrow the rule.

1. A company as a member. If at least one member is a company, the company’s share is excluded when the AOP’s total income is computed. The company is taxed separately, at the rate applicable to companies, according to its share.
2. Large AOPs without audited accounts. A member’s share is not exempt if the AOP had turnover of Rs. 300 million or more in the tax year or any of the preceding tax years, and financial statements audited by a firm of Chartered Accountants (under the Chartered Accountants Ordinance, 1961) or a firm of Cost and Management Accountants (under the Cost and Management Accountants Act, 1966) were not filed with the AOP’s return.

Limited liability partnerships. Section 92(4A), inserted by the Finance Act, 2026, says that where the income of a limited liability partnership is exempt from tax, any amount a member receives as a share of profits earned by it is included in that member’s income.

How does it work in practice?

The firm computes its own taxable income and pays tax on it. For tax year 2027 an AOP pays tax on the same slab table that applies to non-salaried individuals, in clause (1) of Division I of Part I of the First Schedule. That table charges 0% up to Rs. 600,000 and rises to 45% on income above Rs. 5,600,000.

Once the firm has paid its tax, each partner’s share out of the firm’s income is exempt in the partner’s own hands. The partner does not add it to taxable income as business income.

The exemption is not the end of the story. Section 88 says that where an individual has taxable income and also derives an amount exempt under section 92(1), the tax on the taxable income is computed with a formula that takes the exempt amount into account. In practice, the exempt share can push the rate on a partner’s salary, rent or other income higher.

Worked example (illustrative figures)

Bilal, Sana and Tariq run a garments trading firm in Lahore, sharing profits 40:35:25. For tax year 2027 the firm has made-up taxable income of Rs. 9,000,000 and no company partner.

1. Tax on the firm under clause (1): the band above Rs. 5,600,000 is Rs. 1,610,000 plus 45% of the amount exceeding Rs. 5,600,000.
2. Amount above Rs. 5,600,000: Rs. 9,000,000 minus Rs. 5,600,000 = Rs. 3,400,000.
3. 45% of Rs. 3,400,000 = Rs. 1,530,000.
4. Firm’s tax: Rs. 1,610,000 + Rs. 1,530,000 = Rs. 3,140,000.
5. Bilal’s 40% share of the firm’s income, Rs. 3,600,000, is exempt in his hands under section 92(1), because the firm has paid tax.

If Bilal has no other taxable income, section 88 has nothing to bite on. If he also earns rent or a salary, section 88 uses his exempt share to fix the rate on that other income.

What if …?

What if a company is one of the partners? Say a private limited company holds a 30% share. Under the first proviso, that 30% is left out of the AOP’s total income, and the company is taxed on its share at the company rate. The remaining partners’ income is computed without it.

What if the firm is large and has no audited accounts? If turnover reached Rs. 300 million in the year or any preceding tax year, the partners’ shares lose the section 92(1) exemption unless audited financial statements were filed with the AOP’s return. The proviso does not say how the non-exempt share is then computed or whether the AOP’s tax is credited against it.

What if the firm paid no tax, for example because it made a loss? Section 92(1) grants the exemption “where the association of persons has paid tax”. The Finance Act, 2026 omitted an Explanation that had said a member’s share stays exempt where the AOP’s income is exempt and no tax is payable. The current text does not say how a share is treated when the AOP paid no tax, so this point is unclear on the face of the law.

Common mistakes

• Adding the share to business income. The share is exempt under section 92(1). It belongs in the section 88 computation, not in taxable income.
• Assuming the exemption means the share has no effect. Section 88 uses it to set the rate on other income.
• Treating a private limited company as an AOP. Section 80(2)(a) excludes a company from the meaning of association of persons.
• Ignoring the Rs. 300 million test in earlier years. The turnover test looks at the tax year “or any of the preceding tax years”.

What to check in the official text

Read section 92(1) with both provisos and sub-section (4A), then section 80(2) for the definitions of association of persons, company and firm. Read section 88 for the rate formula. The rate table is in clause (1) of Division I of Part I of the First Schedule; check it in the official PDF, since the site text drops tables. A surcharge and a super tax can add to an AOP’s tax; they are covered on separate pages.