Can I carry forward the extra minimum tax I paid and adjust it in later years?

When minimum tax under section 113 is higher than the tax your profit would normally attract, you pay the higher figure. The Ordinance does not treat the difference as lost at once. It lets you carry that difference forward and set it against normal tax in later years, within a short window.

What does the law say?

Section 113(2)(c) of the Income Tax Ordinance, 2001 provides that where tax paid under sub-section (1) exceeds the actual tax payable under clause (1) of Division I, or Division II, of Part I of the First Schedule, “the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year”.

Three further rules sit in the same clause:

1. Loss or nil tax years. The first proviso says that if minimum tax was paid because no tax was payable or paid for the year, “the entire amount of tax paid under sub-section (1) shall be carried forward for adjustment in the manner stated aforesaid”.
2. Two-year limit. The second proviso says the amount is carried forward and adjusted against tax liability for two tax years immediately succeeding the tax year for which it was paid.
3. Which tax it can reduce. The Explanation says “the aforesaid Part” means clause (1) of Division I or Division II of Part I of the First Schedule. Division II is for companies. For an individual running a business, clause (1) of Division I is the slab table.

How does it work in practice?

Each year the business compares normal tax with minimum tax:

• Normal tax is tax on taxable income under the clause (1) slab table.
• Minimum tax is turnover multiplied by the Division IX rate, which is 1.25% in all other cases for tax year 2027.

In a year where minimum tax is higher, the excess is recorded as an amount to carry forward. In a later year where normal tax is the higher figure, the carried amount is set against that normal tax. The adjustment has to happen in one of the two tax years right after the year of payment.

The footnotes to section 113 show that the window has shrunk. An earlier version of the proviso gave five tax years, the Finance Act, 2022 substituted the word “five”, and the Finance Act, 2025 substituted the word “three” with the current “two”.

Worked example (illustrative figures)

Sadia runs a garments wholesale business in Lahore as a sole proprietor. Her trade is in “all other cases” in Division IX, so the rate is 1.25%. The tax year 2028 figures below assume, for illustration only, that the tax year 2027 rates stay the same.

Tax year 2027: minimum tax is higher. Turnover Rs. 160,000,000. Taxable income Rs. 4,000,000.

1. Normal tax: the band for income over Rs. 3,200,000 up to Rs. 5,600,000 is Rs. 650,000 plus 40% of the amount over Rs. 3,200,000. So Rs. 650,000 + 40% of Rs. 800,000 = Rs. 650,000 + Rs. 320,000 = Rs. 970,000.
2. Minimum tax: 1.25% of Rs. 160,000,000 = Rs. 2,000,000.
3. Minimum tax is higher, so she pays Rs. 2,000,000.
4. Excess carried forward: Rs. 2,000,000 minus Rs. 970,000 = Rs. 1,030,000, available in tax years 2028 and 2029.

Tax year 2028: normal tax is higher. Turnover Rs. 150,000,000. Taxable income Rs. 9,000,000.

1. Normal tax: the band above Rs. 5,600,000 is Rs. 1,610,000 plus 45% of the amount over Rs. 5,600,000. So Rs. 1,610,000 + 45% of Rs. 3,400,000 = Rs. 1,610,000 + Rs. 1,530,000 = Rs. 3,140,000.
2. Minimum tax: 1.25% of Rs. 150,000,000 = Rs. 1,875,000.
3. Normal tax is higher, so normal tax of Rs. 3,140,000 is the liability.
4. Adjustment of the carried amount: Rs. 3,140,000 minus Rs. 1,030,000 = Rs. 2,110,000.
5. Nothing is left to carry into tax year 2029.

In this example the tax after adjustment, Rs. 2,110,000, is still above that year’s minimum tax of Rs. 1,875,000.

What if normal tax is not high enough to absorb the whole amount?

Section 113(2)(c) does not say whether the carried amount may reduce a later year’s tax below that later year’s own minimum tax, or what happens where minimum tax applies again in the later year. The text is silent on both points, and this page does not resolve them. What the second proviso does make clear is the end point: any part not adjusted within the two tax years immediately after the year of payment is not carried further under this clause.

What if I paid minimum tax in a loss year?

Then the first proviso applies. With a loss, no normal tax is payable, so the whole minimum tax paid is carried forward, not just a difference. The same two-year limit applies.

Common mistakes

• Relying on the old five-year or three-year window. Under the current text it is two tax years.
• Setting the amount against other taxes. The Explanation limits adjustment to tax under clause (1) of Division I or Division II of Part I of the First Schedule. No other tax is named.
• Confusing this with business loss carry forward. A business loss is a different item carried forward under its own rules. Excess minimum tax is tax paid, not a loss.

What to check in the official text

Read section 113(2)(c) with both provisos and the Explanation, together with the footnotes recording each change to the carry forward period. The clause (1) slab table and the Division IX table are in the official PDF amended to 30 June 2026, as our site copy of the Ordinance leaves out tables. Rates for tax year 2028 depend on the next Finance Act, which is not in this corpus.