Is a medical or law practice taxed differently if run as a partnership firm or company?

The form a practice takes changes who the taxpayer is. A sole practitioner is taxed as an individual. A partnership firm is taxed as one unit, an association of persons. A company is taxed as a company, with a second layer when profits reach shareholders as dividends. This page sets out what the Ordinance says for each. It does not recommend a structure.

What does the law say?

Firms, section 92. An association of persons “shall be liable to tax separately from the members of the association”. Where the association has paid tax, the amount a member receives as member out of its income is exempt. The Ordinance’s definition of association of persons expressly includes a firm. Three points in section 92 matter to professional firms:

• where a member is a company, that company’s share is taxed separately at company rates;
• a member’s share is not exempt where the association had turnover of Rs. 300 million or more in the year or any preceding year and did not file financial statements audited by a firm of chartered accountants or cost and management accountants with its return;
• section 92(4A), inserted by the Finance Act, 2026, includes in a member’s income the share of profit from a limited liability partnership whose income is exempt.

Section 21(j) disallows, in the firm’s own computation, any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member.

Companies, section 94. “A company shall be liable to tax separately from its shareholders.” Section 94(2) says dividends a company pays are taxable under the separate dividend rules.

What rates apply in tax year 2027?

Structure	Rate source	Rate
Individual practitioner	Division I, clause (1)	0% to 45% in six slabs
Firm (association of persons)	Division I, clause (1)	Same slabs
Professional firm prohibited from incorporating	Proviso to clause (1)	Top slab 40% instead of 45%
Company, other than banking or small company	Division II Table	29%
Small company	Division II Table	20%

The clause (1) slabs are: 0% up to Rs. 600,000; 15% above Rs. 600,000; Rs. 90,000 + 20% above Rs. 1,200,000; Rs. 170,000 + 30% above Rs. 1,600,000; Rs. 650,000 + 40% above Rs. 3,200,000; and Rs. 1,610,000 + 45% above Rs. 5,600,000.

Whether a particular profession is prohibited from incorporating depends on laws and professional body rules that are not in this corpus.

Worked example (illustrative figures)

A two-partner law firm in Islamabad has made-up taxable income of Rs. 8,000,000 for tax year 2027. Assume it is a professional firm prohibited from incorporating by its regulating body’s rules.

1. Income above Rs. 5,600,000: Rs. 8,000,000 - Rs. 5,600,000 = Rs. 2,400,000.
2. At the proviso rate of 40%: Rs. 2,400,000 x 40% = Rs. 960,000.
3. Firm’s tax: Rs. 1,610,000 + Rs. 960,000 = Rs. 2,570,000.
4. Had the 45% rate applied: Rs. 1,610,000 + Rs. 1,080,000 = Rs. 2,690,000.
5. Difference from the proviso: Rs. 120,000.

The firm has paid tax, so each partner’s share received as member is exempt under section 92(1). Salaries or profit on capital paid to the partners are not deductible in the firm’s computation under section 21(j).

For comparison only, a company with the same Rs. 8,000,000 at 29% would pay Rs. 2,320,000, before any tax on dividends paid out, which falls on shareholders separately. The comparison leaves out minimum tax, dividend tax and other differences, so it is not a like-for-like result.

What about tax deducted from fees?

Section 153 requires prescribed persons to deduct tax from payments for services, and defines services to include those of doctors, dentists, lawyers and accountants “otherwise than as an employee”. Section 153(3) makes that deduction minimum tax. The current text of section 153(3) does not carve companies out of that treatment.

The Division III rate of 15% refers to independent professional services by doctors, lawyers and others “working independently”. The text does not say in terms whether a firm or company receiving the fees falls under that entry or under the general services entry. This page does not resolve the point.

Common mistakes

• Relying on the old section 153(6) proviso. The consolidated PDF prints a proviso saying section 153(6) “shall not apply to companies” for services. That text sits in a footnote reproducing the section as it stood before the Finance Act, 2011 substituted it. It is not current law.
• Assuming every firm gets 40%. The proviso is limited to professional firms prohibited from incorporating by law or by their regulating body’s rules.
• Deducting partner salaries. Section 21(j) disallows them at firm level.
• Treating company tax as the whole cost. Section 94(2) taxes dividends separately.

What to check in the official text

Read section 92 with its provisos, section 94, section 21(j), the clause (1) table and proviso in Division I and the Division II table of Part I of the First Schedule, and section 153(3). Check the rules of your professional body on incorporation, which are outside this corpus.