Sole proprietors and small businesses

Registering, keeping records, turnover tax and filing for a one-person business. Each answer below explains one point in plain words, works through an example, and links the exact section of the law it relies on.

• Is there a 10% surcharge on business income, and does it apply to me?Section 4AB adds a surcharge of 10% of Division I tax where an individual's taxable income exceeds Rs. 10 million. Individuals with salary income pay none.
• Which taxes withheld from my business can I adjust against my income tax, and which are final?Section 168 allows credit for tax withheld unless it is final under 168(3). Section 153 deductions are minimum tax; 236H and 231AB tax are adjustable.
• Which taxes withheld from my business, such as advance tax on my purchases, are adjustable and which are final?Section 168 credits withheld tax against your year-end tax unless section 168(3) makes it final. Advance tax on purchases under 236G and 236H is adjustable.
• What books of account and records must a sole proprietor keep, and for how long?Section 174 and Income Tax Rules 29 and 30 set the minimum records for a business, kept in Pakistan for six years, longer while any proceeding is pending.
• Which business expenses are not allowed as a deduction under section 21?Section 21 blocks income tax, fines, personal costs, capital spending, 10% of purchases from non-NTN holders and some cash payments, explained for small firms.
• Which expenses does the law not allow as a deduction for a business?Section 21 blocks deductions for income tax, fines, personal spending, capital costs and some cash payments, and section 174 lets unreceipted claims be refused.
• My business made a loss. Can I set it off against my salary or rent, or carry it forward, and for how many years?Section 56 bars setting a business loss against salary or property income. Section 57 carries it forward against business income for up to six tax years.
• Can I set off my business loss against my salary or rental income?Section 56 lets a business loss reduce income under other heads in the same year, but not salary and not income from property. The rest carries forward.
• I deposit a lot of cash sales in my bank account. Can FBR treat it as unexplained income?Section 111 taxes amounts, money and suppressed sales a person cannot explain. How it touches cash deposits, and why records that tie deposits to sales matter.
• My business made a loss. Can I carry it forward, and for how many years?Section 57 carries an unabsorbed business loss forward against business income for up to six tax years, oldest first. Unabsorbed depreciation has its own rule.
• Can I carry forward the extra minimum tax I paid and adjust it in later years?Section 113(2)(c) carries minimum tax paid above normal Division I tax forward for adjustment, but only for the two tax years right after the year it was paid.
• If I pay a supplier or employee in cash above a certain amount, is that expense disallowed?Section 21(l) disallows expenses over Rs. 250,000 under one head not paid through the bank, and 21(m) disallows cash salary above Rs. 32,000 a month.
• If I pay a supplier or staff in cash above a certain amount, is that expense disallowed?Section 21(l) disallows spending over Rs. 250,000 per account head paid outside the business bank account, and 21(m) cash salary over Rs. 32,000 a month.
• How do I close my business for tax purposes, and do I still file returns afterwards?Section 117 requires written notice within fifteen days of closing a business and a return for the part year. Why later returns can still be required.
• How do I close my business for tax purposes, and do I still have to file returns?Section 117 requires written notice to the Commissioner within 15 days of closing a business, and a return for the part-year, treated as a separate tax year.
• Which business expenses can I deduct, including costs of running the business from home?Section 20 allows costs incurred wholly and exclusively for business. Personal costs are barred, and mixed home and business costs are split under section 67.
• Can I claim depreciation on my shop equipment, furniture, vehicle or machinery?Section 22 allows yearly depreciation on business assets at Third Schedule rates, with a 25% initial allowance on new plant and machinery under section 23.
• Can I claim depreciation on my shop equipment, vehicle or machinery?Section 20(2) sends business asset costs to depreciation under section 22 at Third Schedule rates, with an initial allowance for new plant and machinery.
• If I do not deduct withholding tax when I pay someone, can the expense be disallowed?Section 21(c) disallows an expense where required withholding tax was not deducted and paid, capped at 20% for raw materials and finished goods purchases.
• How is my business income calculated? Is tax charged on my sales or on my profit?Normal income tax on a business is charged on profit: receipts under section 18 less deductions under section 20. Minimum tax on turnover is the exception.
• I run a business in my own name. How much income tax do I pay on my profit in tax year 2027, and up to what profit is there no tax?A sole proprietor's profit is taxed on the non-salaried slab table: 0% up to Rs. 600,000, then 15%, 20%, 30%, 40% and 45%. Worked examples for tax year 2027.
• When customers deduct tax from my payments under section 153, is that my final tax?For a sole proprietor, tax deducted under section 153 on goods, services or contracts is a minimum tax, not final. It counts as a credit but acts as a floor.
• I have a job and a side business. Which tax slab applies to me, salaried or business?The salaried slab applies only if salary exceeds 75% of taxable income. Otherwise the steeper business table applies to all your income, salary included.
• What is minimum tax on turnover under section 113, and do I have to pay it even if my business made a loss?Section 113 makes an individual with turnover of Rs. 100 million or more pay a percentage of turnover when normal tax is lower, including in a loss year.
• What is the minimum tax rate on turnover, and what counts as turnover?For tax year 2027 minimum tax is 1.25% of turnover in all other cases. Section 113(3) defines turnover net of sales tax, excise duty and invoice discounts.
• What is the minimum tax rate on turnover: 1%, 1.25% or 1.5%?The current Division IX minimum tax rate for most businesses is 1.25% of turnover, lower for listed sectors. The 1% and 1.5% figures come from superseded text.
• As a sole proprietor, do I have to deduct tax when I pay suppliers, contractors or my own employees?Salary tax under section 149 applies to any employer. Section 153 withholding on suppliers starts once your turnover reached Rs. 100 million in a past year.
• Do I have to file a return if my business income is below the taxable limit, and what must it include?Section 114 requires returns from many people below the taxable limit, such as NTN holders and chamber members. Due 30 September, with a wealth statement.
• Do I have to file an income tax return if my business income is below the taxable limit?Owing no tax does not end the duty to file. Section 114 also covers NTN holders, loss claims, larger property or cars, and people recently charged to tax.
• Do I need a separate NTN for my business, or is my CNIC enough?A business run in your own name is not a separate person. Section 181(4) makes your CNIC your NTN, and section 114 then requires an NTN holder to file a return.
• What is the penalty if I do not keep proper business records or issue invoices?Section 182 sets Rs. 10,000 or 5% of tax for missing records and Rs. 5,000 or 3% of tax for no invoice, whichever is higher. Section 193 adds prosecution.
• Do I have to pay quarterly advance tax under section 147, and how is it calculated?Section 147 covers individuals with latest assessed income of Rs. 1 million or more. Each instalment is a quarter of last assessed tax less quarterly credits.
• What books of account and records must a sole proprietor keep, for how long, and what happens if I do not?Section 174 and rules 29 and 30 set the minimum records for a business, kept six years. Missing records can cost deductions, penalties and prosecution.
• Do I have to register for sales tax as a small business, and am I exempt as a cottage industry?Section 14 of the Sales Tax Act says who must register. A cottage unit meeting all four section 2(5AB) tests, including Rs. 8 million turnover, is excluded.
• What is the section 21(s) rule on sales received in cash over Rs. 200,000?Section 21(s) disallows half the expenditure claimed for a sale where over Rs. 200,000 on one invoice was received outside banking channels or digital means.
• What is the section 21(s) rule on sales received in cash over Rs. 200,000?Section 21(s) disallows half the expenditure claimed for a sale where over Rs. 200,000 was received on one invoice outside a banking channel or digital means.
• Do I need a separate NTN for my business, or is my CNIC enough?For an individual, section 181(4) makes the CNIC the National Tax Number. A business in your own name is not a separate person, but you still register.
• Is there a reduced tax rate for small manufacturers, and do I qualify as an SME?Manufacturers with turnover up to Rs. 250 million are SMEs. The Fourteenth Schedule taxes them at 7.5% or 15% of income, or 0.25% or 0.5% of turnover.
• What does turnover include for minimum tax: gross sales, sales tax, returns and discounts?Section 113(3) defines turnover as gross sales or receipts less sales tax, federal excise duty and invoiced trade discounts, and excludes income taxed as final.