Does minimum tax on turnover under section 113 apply to a software house?

Who does section 113 apply to?

Section 113(1) applies to a resident company, a permanent establishment of a non-resident company, and individuals and associations of persons with turnover of one hundred million rupees or more in tax year 2017 or any later tax year. It does not carve out IT businesses. A software house incorporated in Pakistan is inside section 113 from its first tax year.

The section is triggered when, “for any reason whatsoever allowed under this Ordinance”, no tax is payable or the tax payable is below the Division IX percentage of turnover. The listed reasons are a loss for the year, a brought forward loss, an exemption, credits or rebates, and allowances or deductions including depreciation and amortization. So it does not matter why a software house’s tax is low. A year of heavy hiring, a new office fit-out with large depreciation, or a carried forward loss can all bring section 113 into play.

What rate applies to a software house?

Division IX of Part I of the First Schedule, as amended to 30 June 2026, lists rates by sector. Two gas companies (above a turnover of one billion rupees), Pakistan International Airlines Corporation and poultry businesses sit at 0.75%. Oil refineries, motorcycle dealers and oil marketing companies are at 0.5%. Rice mills, flour mills, e-commerce supplies, used vehicle dealers and some others are at 0.25%. Everyone else falls under S. No. 4, “In all other cases”, at 1.25%. Software development, IT services and IT enabled services are not named in any row, so 1.25% is the rate that fits a software house for tax year 2027.

Why are export proceeds treated differently?

Section 113 keeps final-tax income out of both sides of the comparison.

• Turnover. Section 113(3)(b) counts “the gross fees for the rendering of services”, except fees “covered by final discharge of tax liability” for which tax is separately paid or payable. Section 154A(2) makes the bank’s deduction on IT export proceeds a final tax once its conditions are met (return filed, withholding statements filed where required). Those proceeds are therefore outside turnover.
• Tax paid. The Explanation to section 113(1) says “tax payable or paid” does not include tax on deemed income assessed as final discharge of liability under section 169, or the super taxes charged under the Ordinance.

Section 169(2)(a) completes the picture: final-tax income is not chargeable under any head in computing taxable income. The result is that section 113 compares only the local side of the business: local turnover against tax on local taxable income.

Where does section 153 fit in?

Local clients that are prescribed persons deduct tax under section 153 when they pay for services. Section 153(3) makes that deduction minimum tax, and its Explanation says the income concerned is “the amount on which tax is deductible”. So a software house’s local receipts can face two floors: the section 153 deduction on each payment, and section 113 on total turnover.

The Ordinance does not spell out how the two are combined. The Explanation to section 113(1) excludes only final taxes and the super taxes from “tax payable or paid”; it says nothing specific about section 153 deductions. This page does not resolve that point.

Worked example (illustrative figures)

A private company in Lahore, registered with the Pakistan Software Export Board, for tax year 2027:

• Export proceeds: Rs. 150,000,000, with section 154A tax deducted by the bank as final tax.
• Local service receipts: Rs. 40,000,000.
• Taxable income from the local business after expenses and depreciation: Rs. 1,200,000.

1. Normal tax at 29% (“Any other company” in Division II): Rs. 1,200,000 x 29% = Rs. 348,000.
2. Turnover for section 113 leaves out the export proceeds: Rs. 40,000,000.
3. Minimum tax: Rs. 40,000,000 x 1.25% = Rs. 500,000.
4. The final tax on exports is not counted as tax paid under the Explanation.
5. Rs. 348,000 is below Rs. 500,000, so the company pays Rs. 500,000 on the local business.
6. The excess, Rs. 500,000 minus Rs. 348,000 = Rs. 152,000, is carried forward under section 113(2)(c) for up to two tax years.

If the local clients had deducted tax under section 153 on the Rs. 40,000,000, that deduction would itself be minimum tax, and as noted above the Ordinance does not say how it interacts with this calculation.

What if …?

The company opts out of final taxation on exports. Section 154A(3) lets a person opt out, with the option exercised every year when the return is filed. It also removes final treatment when the conditions are not met. In either case the proceeds are no longer covered by final discharge of liability, so on the wording of section 113(3)(b) they would count in turnover.

The business is a sole proprietor or partnership. Section 113 reaches an individual or association of persons only once turnover reaches one hundred million rupees in tax year 2017 or a later year.

The company is a “small company”. Division II taxes a small company, as defined in the Ordinance, at 20% rather than 29%. That changes the normal tax figure in step 1 but not the 1.25% minimum.

Common mistakes

• Including export proceeds in turnover when the section 154A tax on them is final.
• Counting export tax as tax paid when testing against the minimum. The Explanation to section 113(1) excludes it.
• Assuming IT exporters are exempt from section 113. The Second Schedule once switched section 113 off for income from export of computer software and IT services. The footnotes show that sub-clause was omitted by the Finance Act, 2021.
• Relying on an old carry forward period. The footnotes record five, then three, and now two tax years.

What to check in the official text

Read section 113(1) to (3) and the Division IX table in the Ordinance as amended to 30 June 2026, with sections 153(3), 154A(2) and (3) and 169(2). Check whether any clause of Part IV of the Second Schedule applies to your particular business before relying on the 1.25% rate.